Sat, June 08, 2013
Last week, the Board of Trustees for the Social Security trust funds issued its annual report for 2013. Despite the temporary reduction in payroll tax collections enacted in response to the Great Recession, they project that the dates for exhaustion of the Medicare and Social Security trusts remain unchanged: the Social Security trust is expected to run out in 2033, and the Medicare trust should do the same in 2026. The Trustees also oversee the trust that covers Social Security Disability benefits, and they warn that the disability trust will be depleted much sooner, in 2016.
After 2033, the Trustees project that 77 percent of planned benefits will continue to be payable through income from payroll taxes. In order to avoid future insolvency, the report suggests a couple of possible changes in Social Security: either payroll taxes need to increase permanently by 2.66% (from the current rate of 12.40% to 15.06%) or scheduled benefits need to be reduced by about 16.5% to all current and future beneficiaries.
The Trustees also observe, somewhat drily, that if the future insolvency issue is not dealt with, there is a point of no return – if the problem is ignored until the reserves are depleted in 2033, even cutting benefits 100% for 2033 beneficiaries would not be enough to cover the shortfall in revenues. Thus, the Trustees urge “that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes and give workers and beneficiaries time to adjust to them.”
A recent New York Times op-ed piece claims that the situation is actually worse than the report indicates. The article, “Social Security: It’s Worse Than You Think,” argues that the methods used to reach the Trustee’s conclusions are seriously flawed. According to researchers Gary King and Samir Soneji, the government is under-estimating the effects of increasing longevity. If, as they claim, Social Security beneficiaries will live longer than the Trustees estimate, they will receive benefits for longer than current estimates indicate, and the Trusts will be depleted sooner than expected.
The political realities associated with Social Security are such that few lawmakers are willing to initiate the unpleasant tax increases and/or benefit cuts that are needed to address the future insolvency of the trusts. Other alternatives include raising the age at which full benefits are received or reducing the annual cost-of-living adjustments given to beneficiaries. This last change was suggested during recent deficit reduction negotiations.
Unsurprisingly, the proposal to reduce future Social Security cost-of-living increases has been met with howls of protest from various quarters, including an editorial in the New York Times and this position paper from AARP. Social Security continues to be the “third rail” of American politics. It seems unlikely that a lasting solution will be found to prevent a reduction in future Social Security benefits without a considerable change from the current political climate.
Until a lasting solution is found, workers planning for retirement will be wise to plan on receiving future Social Security benefits that are 15 -25% lower than the numbers projected on their annual SSA benefit statements.