Every year, trustees of the Social Security trust funds issue an annual report. And every year, the media overreact and misreport to the American public what the trustees have to say. Here are a few headlines, which I feel are misleading:
- “The Social Security Trust Fund Goes Bust” — The Wall Street Journal, June 7, 2018
- “Social Security & Medicare are slowly dying, but no one in Washington will lift a finger” — USA Today, June 13, 2018
These news reports use terms like “dire warning,” “expected to be depleted,” and “goes bust” in ways that aren’t quite accurate.
Social Security is not going bankrupt, going bust or dying. In fact, the majority of its benefits will always be covered by our taxes. True, as a nation we face some major decisions related to Social Security. Benefits may need to be reduced — or taxes may need to be raised to continue programs in their current form — but the programs are not going bust. So, what’s really going on?
Social Security is not dying
More than 50 million people receive Social Security benefits, says the Chief Actuary of the Social Security Administration. They are the government’s largest entitlement programs. Together, Social Security and Medicare account for 40 percent of federal spending, says the New York Times.
Social Security pays for benefits by drawing from payroll tax collections and the interest generated by its reserve funds. It’s generally a pay-as-you go system. Costs have increased recently because birth rates have dropped from three children per woman (1946-1965) to two per woman (1970 on). Each worker today has to support more retirees than in the past because there are fewer workers.
This year’s trustees report, released June 4, 2018, says the combined reserve funds for Social Security will dry up in 16 years. Assuming that projection is true, and that the economy grows at its current rate, Social Security benefits would have to be cut by 21% “if lawmakers do nothing to cure the program’s long-term funding shortfall,” says a CNN report.
Yes, benefits may need to change. But that’s not the same as saying Social Security is “going broke” or “dying.”
What can be done?
Congress has been aware of the problem for some time.
- In 1993, public trustees warned of “the need for congressional action to ensure the continued viability and fiscal integrity of [Social Security],” says The Wall Street Journal.
- In 2010, Social Security expenditures exceeded its tax income for the first time and began drawing on its trust funds’ interest earnings, the Journal says.
- In 2014, Charles Blahaus and Robert D. Reischauer, former public trustees for Social Security and Medicare programs, warned the public that “continued delay in legislating corrective measures [would] … result in undesirable consequences,” notes the Journal.
Will this year be any different, with lawmakers focused on planning for the mid-terms in November? As I see it, we have three options:
- Increase payroll taxes by raising the payroll tax rate. For example, to make Social Security solvent for another 75 years, the payroll tax rate would have to be increased permanently from 12.4% to 15.18%, the Times notes. Raising taxes is never a popular or easy choice, but the Social Security payroll tax paid by employees has been 6.2% since 1990 … perhaps it’s time.
- Cut benefits. Again as an example, Social Security benefits would have to be slashed by 21% to keep Social Security solvent for 75 years, the Times says. Cutting benefits would be difficult, and in my mind the less likely solution, since an estimated 67% of current retirees consider Social Security a major source of income according to a 2018 Retirement Confidence Survey. That same survey also highlighted a clear mental shift already taking place among younger workers where only 36% anticipate Social Security will be a major source of income.
- Both. Enact a program of both tax rate increases and benefit cuts.
It’s almost certain that nearly every American of voting age will find fault with paying more taxes. And, Social Security programs are so vital to society that I can’t imagine legislators allowing any Social Security benefits to “dry up.”
While tough choices lie ahead, the Chief Actuary of the Social Security Administration says we have “time to make desired changes in a careful and thoughtful manner,” which further emphasizes that Social Security is not ‘going bust,’ as the media would have you believe.