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Social Security Taps Its Piggy Bank

Social Security Administration building sign
Social Security Administration building, Sacramento, Calif. Photo by Flickr user ilvadel.

Social Security is back in the headlines, and as usual, it isn’t because of how well the program is doing.

Last week the trustees for Social Security released their annual report, which included the news that the program will need to draw from its trust fund to help cover benefits this year – the first time it has needed to do so since 1982. This is three years sooner than the 2017 report anticipated. Absent major changes to the program, Social Security’s trust fund will be depleted by 2034, the report indicated.

This is and is not news. The 2034 date is identical to last year’s projection, and it is within a year of what trustees predicted six years ago. On the other hand, given the strength of the economy overall, seeing the stepped-up timeline for tapping the program’s trust fund gave me pause. President Trump and Congress do not appear to be seriously interested in addressing this problem in any capacity. If we have to wait until 2020, or potentially 2024, for this issue to become a priority, the situation could dramatically worsen in the meantime.

The United States’ gross domestic product has grown steadily since 2010, and estimates show that federal tax revenues have grown as well. If economic growth alone could slow or reverse the funding problems that Social Security and Medicare face, we would expect to see some evidence by now. Social Security is dipping into its trust sooner than expected under strong economic conditions; I would hate to see the effects of a sustained downturn.

The trustees reported that Social Security’s costs are projected to exceed its total income this year, thus necessitating the expected dip into the program’s trust fund. As the trust funds are depleted, it is likely the program will eventually need to pay partial benefits; the trustees’ report says continuing payroll tax revenues would likely cover about 79 percent of scheduled benefits after the trust fund entirely runs out. Note that, technically, Social Security’s trust funds are two separate funds: one for disability insurance reserves and the other for retiree and survivors benefits. The 2034 projection is for the combined balance – the disability fund is currently projected to run out in 2032, and the retiree fund two years later. Lawmakers have traditionally evened out the two funds when they are out of balance, but doing so won’t solve the potential problem of running out of funds altogether.

The trustees’ report projects serious and ongoing problems for Medicare too, indicating that its trust fund will be depleted by 2026, three years sooner than the previous prediction. Medicare’s future is further complicated by rising health care costs, which may be worsened by recent legislative changes such as the repeal of the penalty for people who do not buy health insurance (who might instead defer treatment until they are covered under Medicare) and the elimination of a board designed to slow Medicare growth.

We have known that Social Security was in trouble for some time. Many individuals and organizations have put forward a variety of bipartisan, common-sense recommendations for shoring up the program, such as raising the retirement age, raising payroll taxes or increasing means testing. The trustees’ report notes that full solvency would require a permanent payroll tax hike of 2.78 percentage points or a cut to scheduled benefits of as much as 21 percent, depending on whether legislators apply the cuts across the board or only to new beneficiaries. Lawmakers could also institute some combination of these solutions, reducing the severity of each change.

Part of the problem is simple demographics. In 1960, there were about five workers for every Social Security beneficiary; in 2016, that figure fell to 2.8, with projections it could reach 2.2 by 2035, once most baby boomers have retired. This trend is unlikely to reverse anytime soon, considering there were fewer births in 2017 than any year since 1987. In addition, Americans are living longer, which means the overall number of people on Social Security, currently about 62 million, is expected to hit 90 million by 2040. Even in a booming economy, there are simply fewer workers paying in relative to beneficiaries expecting the program to pay out.

A potential solution, or at least a partial one, would be to encourage further immigration – a position antithetical to the current administration’s policies. In fact, the Trump administration is poised to make the worker-beneficiary ratio even worse. Young immigrants who qualified for the Deferred Action for Childhood Arrivals program, often called “Dreamers,” face deep uncertainty about their future in this country, yet deporting them could lead to a potential $60 billion loss in federal tax revenue. Creating a clearer path to legal immigration for skilled workers, too, could increase payroll tax revenues, but there is no evident political momentum behind such a solution.

Reasonable people can disagree on how we should fix Social Security, but the fact we need to take action should be self-evident by now. Yet the White House has demonstrated no appetite for entitlement reform. Trump promised that cuts to the program were off the table. His administration continues to insist that a strong economy will bolster the program sufficiently, but so far we have seen no evidence that this theory is true. In fact, the trustees’ report said outright that the 2017 tax reform law will likely have only modest effects on the program’s future (or that of Medicare).

Congress also does not appear to be eager to take action on Social Security or Medicare. House Speaker Paul Ryan has repeatedly pushed for a major overhaul, but has faced bipartisan opposition and is set to retire at the end of his current term. The common-sense solutions proposed by economists are understandably hard to sell to voters, and it seems most legislators would rather ignore the issue and hope it doesn’t come to a head until it has become some future officeholder’s problem.

Yet waiting to make changes is likely to ensure that those changes – whether increased taxes, reduced benefits or both – will need to be even more dramatic. By now, most working-age people who are decades away from retirement should understand that they may not get the same deal that was offered to their parents. But compared to the prospect of allowing the system to collapse altogether, I think most workers, especially younger ones, would prefer to accept long-term changes.

The annual report on Social Security’s future is a reminder that we can’t wish our problems away. Instead, we should take action to fix the problem. Sacrifice isn’t fun, but it is necessary for the long-term future of our country’s safety net.

Managing Vice President Paul Jacobs, of our Atlanta office, is among the authors of our firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. He wrote Chapter 12, "Retirement Plans"; Chapter 15, "Investment Approaches And Philosophy"; and Chapter 19, "A Second Act: Starting A New Venture." He also contributed to the firm’s book The High Achiever’s Guide To Wealth.

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