The Can That Keeps Getting Kicked Down the Road: Social Security Trustees Annual Report Has More Bad NewsFinancial and taxes in retirement
August 15, 2017 — If you are receiving Social Security or you plan on relying on it for your retirement, this news is important. If no action is taken, your benefits will take a big haircut in just 17 years.
Every year the Social Security Trustees prepare an annual report. The one for 2016 was just published, and once again it predicts trouble ahead for the nation’s system of Federal Old Age and Survivors Insurance and Federal Disability Insurance Trust Funds (OASDI), otherwise known as Social Security. Every year the Trustees warn Congress that something must be done, and every year Congress kicks it down the road. Fixing the system will be painful, but in our opinion, something must be done. The longer it takes to correct the system, the worse the problem gets.
Income still higher than expenditures – for now
Total expenditures in 2016 were $922 billion, while total income was $957 billion: the surplus for the year was $35 billion. Asset reserves held in special issue U.S. Treasury securities continued to grow. Social Security’s total income is projected to exceed its total cost through 2021, as it has for every year since 1982.
Interest income not enough to cover program cost deficit
The Trustees project that interest income, which was $88 billion in 2016, is shrinking every year. Up to this point it has helped cover the deficit of expenses over contributions paid in. As interest income declines, however, the total surpluses will turn to deficits, starting in 2022.
When we’ll run out of money
The hypothetical combined trust fund reserves become depleted in 2034. Considered separately, the DI Trust Fund (Disability) reserves become depleted in 2028 and the OASI Trust Fund (Retirement) reserves run out in 2035. That is relative good news for the DI Fund (last year it was expected to run out in 2023). The change in the reserve depletion date for DI is largely due to continuing favorable experience for DI applications and benefit awards. The Retirement Fund is projected to run out of reserves in 2035, the same date as last year.
What this means
That doesn’t mean that starting in 2035 there won’t be any money in the till to pay benefits. Instead, any benefits paid out will have to come from what is generated from the folks paying into the system each year. Benefit payments would have to be cut to fit available income, meaning we would only get 75% of promised retirement benefits.
Two solutions offered – increase taxes or cut benefits
The Trustees offer two alternatives for shoring up the nation’s Social Security system for the next 75 years. Neither one is likely to be popular, but we must do something.
1) Increase revenues (taxes): Revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.76 percentage points to 15.16 percent
(2) Reduce benefits: Scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of about 17 percent applied to all current and future beneficiaries
or (3) Some combination of these approaches.
What the Trustees recommends
The advice from the Trustees is simple and logical. Oh that it would be heard by our legislators as they enjoy their summer recess. Here is what the Trustees say in their report:
“The Trustees recommend that lawmakers address the projected trust fund
shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them. Implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits and could preserve more trust fund reserves to help finance future benefits. Social Security will play a critical role in the lives of 62 million beneficiaries and 173 million covered workers and their families in 2017. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generation.”
Well said, Trustees!
Comments? We baby boomers can take part of the blame for the coming crisis – we outnumber the people who will be paying our benefits. Both political parties share blame too. But instead of blame, what do you think the solutions should be?