The Social Security trust fund will start going bankrupt in 2013
posted at 6:01 pm on June 22, 2012 by Dustin Siggins
Last week, Just Facts President James Agresti and I co-authored a post for Hot Air describing how some on the left mislead the public regarding the importance of entitlement reform. Today James has released disturbing new information on a misleading statement in the newest Social Security Trustee report on the future of the program:
The 2012 Social Security Trustees Report—the authoritative source on the program’s finances—states that the program’s “trust fund assets” will “continue to grow” through 2020, a claim that has been repeated by numerous sources as varied as US News & World Report, the AFL-CIO, and the American Academy of Actuaries. However, as revealed by data buried deeper in the 252-page Trustees Report, this assertion disregards the effects of inflation, which are projected to overrun any expected trust fund gains and contribute to an accelerating decline that will start in 2013.
This is not the first time the government has failed in its duty to inform the public as to the fiscal reality of Social Security. Consider the following since the program began:
1. In 1936, the government told Americans the following:
The taxes called for in this law will be paid both by your employer and by you. For the next 3 years you will pay maybe 15 cents a week, maybe 25 cents a week, maybe 30 cents or more, according to what you earn. That is to say, during the next 3 years, beginning January 1, 1937, you will pay 1 cent for every dollar you earn, and at the same time your employer will pay 1 cent for every dollar you earn, up to $3,000 a year. Twenty-six million other workers and their employers will be paying at the same time.
After the first 3 year–that is to say, beginning in 1940–you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. This will be the tax for 3 years, and then, beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. After that, you and your employer will each pay half a cent more for 3 years, and finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.
Clearly, given that Americans pay 12.4% of their income into Social Security (including 6.2% from employers) up to $110,800, this has not proven consistent.
2. At least twice from 2000 to 2010, the trustees drastically overestimated the future of how much income the program would have for every dollar it spent in 2011. The two years cited in the linked graph overestimated the size by 27% and 20%, respectively.
3. In 2010 the program spent more than it took in for the first time since 1985, and it is expected to do so until my great-grandkids are adults. This was not expected to take place until 2017, though to be fair to the trustees, the recession greatly impacted Social Security’s finances.
4. The 2010 Trustee report estimated Social Security would require taxes to rise by 28% or benefits to be cut by 22% in 2037 in order to keep the program solvent. The 2011 report said similar changes would have to be made in 2036. According to Agresti, the 2012 report says the following:
After 2033, Social Security’s projected shortfalls could be covered by increasing payroll taxes by 33% starting in 2033 and rising slightly thereafter. These deficits could also be covered by reducing benefits by 24% starting in 2033.
In short, the last two reports have said Social Security’s life span is worse than the previous year’s estimate, and the cost of keeping the program healthy has risen dramatically. Clearly, Senate Majority Leader Reid’s (D-NV) January 2011 statement that we should talk to him in 2036 should be updated.
5. Legislative changes made in 1983 were supposed to allow the trust fund to last until 2063. As shown in Point 4, this is not even close to reality.
Unfortunately, Congress appears unwilling to make any significant changes to Social Security, whether they be indexing the retirement age to life expectancy, means-testing the program or allowing partial or full privatization of benefits. Had these or other options been put into law 20 or 25 years ago, they could have greatly extended the life of Social Security with the most minor of impacts on retirees, those near retirement and those decades away from retirement. Instead, elections took priority, and now we are at the point where only major changes will prevent a fiscal collapse of Social Security. How big will this collapse be? Agresti outlines the sad news:
There are several other ways of expressing the program’s expected shortfalls. One measure commonly cited by the press is the 75-year open group unfunded obligation, which amounts to $8.6 trillion. This represents the money that must be immediately added to the trust fund to cover projected shortfalls for the next 75 years. To give this figure some context, it is equivalent to 10.7 times the total income for Social Security in 2011 or an additional $54,500 from every person who paid Social Security payroll taxes in 2011.
The open group unfunded obligation, however, does not provide a full accounting of Social Security’s commitments. According to the Treasury Department’s Financial Report of the United States Government, this metric “understates financial needs by capturing relatively more of the revenues from current and future workers and not capturing all of the benefits that are scheduled to be paid to them.”…This approximates the method by which publicly traded companies are required by law to report the finances of their pension and retirement plans, and it currently amounts to $21.6 trillion or an additional $136,900 from every person who paid Social Security payroll taxes in 2011.
Even the closed group unfunded obligation assumes a proactive approach to Social Security’s looming deficits. If, instead, we continue on our current path and just borrow the money to fund these programs, the shortfall will amount to an additional $276,000 (in 2012 dollars) for every person expected to be paying Social Security taxes in 2086.
Clearly, Social Security’s future is getting worse as time goes on, and we as a nation can’t rely on it. As a member of the Debt-Paying Generation that is going to be taking the brunt of this and other fiscal failures of the federal government of the United States, I implore Congress and the voters to begin making the changes necessary to prevent young Americans from being forced into a lifetime of low employment, high taxes and a Ramen Noodle-filled retirement.