Is Social Security safe? There are some folks in Congress predicting its bankruptcy and pushing cuts in benefits or even privatization of the program. Is there any need for such drastic measures?
First, we’ll review the basics of the program, then we’ll survey the latest numbers provided in the 2020 Annual Report from the Board of Trustees that oversees the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds. Finally, we’ll examine possible fixes that have been proposed to keep Social Security solvent and able to pay benefits for the next 75 years.
- The 2020 Social Security Trustees Report shows that combined retirement/survivor and disability funds will run out in 2035, the same as the 2019 estimate.
- A key reason: The Disability Insurance trust fund is now estimated to last until 2065, 33 years longer than 2032, the prediction of just two years ago.
- Population demographics mean that fixes are still needed to keep both of these funds solvent.
- Repair options include raising the payroll tax, raising or eliminating the ceiling over which no Social Security taxes are paid, changing how COLA is calculated, raising the retirement age, and investing Social Security funds in the stock market.
What Is Social Security?
Notice that insurance is part of the names of both Social Security trust funds. That’s because Social Security was designed during the Great Depression as a safety net to be sure that we never again find seniors living under bridges, as was common then. It was designed as insurance, and Social Security payments are called “benefits.”
But first, let's explore some terminology. The whole program managed by the Social Security Administration (SSA) is known as Old-Age, Survivors, and Disability Insurance (OASDI). Note that, as the annual report’s name makes clear, there are two funds: one for retirees (the OASI Trust Fund), and one for the disabled (the DI Trust Fund). The financial status of each is in a very different position, with different possible solutions to fix the financial problems.
How Does Social Security Pay the Benefits?
Social Security benefits are based on a pay-as-you-go system. That means current workers pay Social Security taxes, while current retirees get benefits based on that tax revenue and earned income from the trust fund bonds.
The concern related to that pay-as-you-go structure is that the huge baby boomer generation (people born between 1946 and 1964) will create a crisis because so many will begin collecting Social Security. By the year 2031, when the youngest boomers reach age 67, there will be 75 million people over the age of 65, nearly double the 39 million who were that age in 2008. This will change the ratio of retirees collecting benefits to workers paying into the system.
The beneficiary-to-worker ratio is expected to rise from 35 per 100 in 2014 and reach 45 per 100 in 2030, putting a strain on that pay-as-you-go system.
This baby boomer wave was not unexpected; in fact, it was planned for in 1983, when Alan Greenspan headed the National Commission on Social Security Reform, also known as the Greenspan Commission. At that time the trust funds almost did run out of money. The commission did an excellent job of finding fixes to deal with the boomer wave.
One of the biggest changes was accelerating scheduled increases in Social Security tax rates, in order to build up the trust funds. In 1983, the tax rate was 5.4% for employees and another 5.4% for employers. The commission proposed hiking it to 5.7% beginning in 1984, then 6.06% in 1988, and 6.2% in 1990.
The year that the Disability Insurance (DI) trust fund will run out of funds.
Today’s Social Security Finances
The Greenspan Commission’s fix worked just as intended, and the nation has billions in the Social Security trust funds. The 2020 annual report on the trust funds showed these basic facts:
- The OASDI trust funds held $2.897 trillion dollars at the end of 2019, or 261% of the estimated cost for 2020.
- Total expenditures for 2019 were $1.059 trillion, and total income was $1.062 trillion.
- Collectively, OASDI trust fund reserves will be depleted in 2035, the same date as last year.
- The depletion dates are different for the two funds. OASI trust funds are estimated to run out in 2034, and DI reserves in 2065. In 2019, DI reserves were projected to run out in 2052, and the year before that in 2032.
- Why the difference? According to the report, “For the second year in a row, there has been a significant change in the DI reserve depletion date for two main reasons: (1) a change in the ultimate assumed disability incidence rate, and (2) continuing favorable experience for DI applications and benefit awards, which remained at historically low levels for 2019.”
- When OASI trust funds are depleted in 2034, only 76% of Social Security benefits will be able to be paid based on the pay-as-you-go income to the OASI trust fund.
- When DI funds are depleted in 2065, if there is no fix in time, 92% of disability benefits will be able to be paid based on the pay-as-you-go income to the DI trust fund.
- For the 75-year projection period, the actuarial deficit is 3.21% of taxable payroll (an increase from 2.78% last year). In other words, Social Security taxes would need to increase by 3.21% to fix the problem permanently.
Yes, a fix is needed to avoid a reduction in benefits when the trust funds run out of money. Many different fixes have been suggested to restore Social Security’s financial health for the next 75 years. A tax increase is not the only way. It is most likely that some combination of the fixes will be used to minimize the impact on everyone. The sooner Congress acts to fix the system, the less painful the fix will be:
- Fix 1: Raise the payroll tax rate. To remain fully solvent over the next 75 years, payroll taxes would have to rise by 3.14 percentage points to 15.54%. At the moment the rate is 12.4%, with 6.2% coming each from workers and their employers.
- Fix 2: Raise the ceiling on which Social Security taxes must be paid. The ceiling was $137,700 for 2020, but the cap is adjusted for inflation each year and rose to $142,800 in 2021. According to a Congressional Research Service report issued Sept. 27, 2019 (and based on 2019 statistics), eliminating the payroll cap while leaving in place current rules for capping benefit calculations would eliminate 84% of the projected 75-year shortfall.
- Fix 3: Change the way the annual cost-of-living adjustments are calculated. The annual cost-of-living adjustment (COLA) for 2019 was 2.8%, the largest in seven years. A 1.6% hike followed for 2020 and 1.3% for 2021. In some years, though—2016, for example—there was no COLA. This means changes may not be an effective long-term fix.
- Fix 4: Raise the full retirement age. In 2020 the full retirement age for baby boomers is 66, and for those who were born in 1960 or after it is 67. Some people are suggesting that it be increased to 69 or 70.
- Fix 5: Invest Social Security trust funds in the stock market. Some people want the Social Security Administration to invest some of the trust fund money in the stock market to get a better return. Of course, the problem with this is an excessive risk.
The Bottom Line
Social Security is nowhere near bankruptcy. As Alicia H. Munnell, director of the Center for Retirement Research at Boston College, put it in her analysis of the 2017 annual report from the Board of Trustees:
Social Security faces a manageable financing shortfall over the next 75 years, which should be addressed soon to share the burden more equitably across cohorts, restore confidence in the nation’s major retirement program, and give people time to adjust to needed changes.
If there is no fix in the next 20 years, reduced benefits could be still paid with pay-as-you-go tax revenue. However, the sooner Congress does pass a fix and makes Social Security solvent, the better it will be for all of us.