Charles Blahous, one of the public trustees for Medicare and Social Security, has released a Guide to the 2015 Social Security Trustees Report. The summary explains why Social Security's finances are unsustainable, citing rising beneficiary-to-worker ratios and growth in per-capita benefits, and urges policymakers to act now to fix the problem so that the required changes are not as sudden or burdensome.
Why are Social Security's Finances Unsustainable?
Last week, the Social Security and Medicare Trustees released their annual reports on the long-term finances of each program, showing that those programs remain financially unsound and on the road toward insolvency. As part of the reports the public trustees, who are appointed members of the public rather than agency heads, release a statement highlighting their thinking around key issues surrounding the trust funds. Three issues stand out in this year’s statement: the need for prompt action to solve the impending exhaustion of the Social Security Disability Insurance (SSDI) Trust Fund; the need for near-term action to solve the imbalance in the Old-Age and Survivors Insurance (OASI) Trust Fund; and the importance of maintaining and building on measures to control Medicare cost growth.
The Impending SSDI Crisis
"It is impracticable to reduce DI costs sufficiently to prevent imminent Trust Fund depletion (and thus, sudden benefit reductions for highly vulnerable individuals) without at least a temporary increase in DI Trust Fund resources, irrespective of its source or combination with other measures."
The Washington Post yesterday issued Congress "a wise prescription for Social Security Disability Insurance," urging lawmakers to use the program's impending insolvency as an opportunity to enact longer-term structural reforms. The Social Security Disability Insurance (SSDI) trust fund is slated for depletion by the end of 2016, at which point benefits would be cut across the board by 19 percent. Lawmakers have repeatedly stated their intent to avert the cut for the nearly 9 million disabled workers and their nearly 2 million dependents who receive SSDI. Many expect that lawmakers will extend solvency by redirecting some of the funds currently going into the Old-Age and Survivors' Insurance (OASI) trust fund to SSDI, extending SSDI's solvency by 17 years according to the Social Security Trustees, while bringing forward OASI's insolvency date by 1 year.
The Post by contrast called on Congress to go beyond just clean reallocation and enact a reallocation “linked to structural changes” that would address flaws they see in the core design of the program:
The problem is that SSDI is far from functioning optimally; while most of the program’s rising cost is, indeed, due to demographics, not all of it is. As recent research in labor economics has shown, some of the growth is due to post-1984 program rules that made it easier to claim disability on the basis of mental or musculoskeletal ailments. Perversely, SSDI provides employers no incentive to keep individuals at work, earning wages, while providing those who get benefits no incentive to return to the workforce. As economist David Autor of MIT has written, “the SSDI program spends too few societal resources helping individuals with disabilities to remain employed and too many resources supporting the long-term dependency of individuals who could be self-sufficient with . . . appropriate accommodation and support.”
Our analysis of the 2015 Social Security Trustees' report noted that "As time goes on, it will be more difficult to secure the Social Security programs for current and future generations with thoughtful changes instead of abrupt benefit cuts or tax increases." We previously detailed how much bigger changes need to be to keep Social Security solvent if lawmakers wait for in both the 2013 and 2014 reports. While the 2015 report showed a slight improvement in the program's projected finances, making the necessary changes slightly smaller, the problem with delaying change remains.
The Trustees state that it would take a 2.62 percentage point increase in the payroll tax to make the program solvent over 75 years, making the rate over 15 percent instead of the current 12.4 percent. Delaying the increase by ten years raises the necessary increase to 3.3 percentage points for a new rate of 15.7 percent. Lawmakers could also undertake gradual payroll tax rate increases, but those rates would need to be slightly higher, particularly if they waited until 2026. Finally, waiting until 2034, when the Trustees project the trust fund to become insolvent, would require a 4 percentage point tax increase for a new rate of 16.4 percent. By then, a gradual increase would not be able to keep the trust fund solvent.
Although the Social Security Trustees estimate the program's financial outlook has slightly improved relative to last year, the Congressional Budget Office (CBO) takes a different view. As with Medicare, CBO is far more pessimistic about Social Security's future. This is true relative to last year, but especially relative to the Social Security Trustees. Indeed, while the Trustees project a 2034 insolvency date (on a combined basis) and 2.7 percent of payroll 75-year shortfall, CBO estimates insolvency will come five years earlier, and that the program will have a 75-year shortfall of 4.4 percent of payroll.
The difference between CBO and the Trustees represents a widening gap between the two scoring agencies that first appeared in 2013. In that year, CBO estimated the shortfall to be 25 percent larger than the Trustees' estimate. In 2014, they estimated it to be nearly 40 percent larger than their counterparts. And this year, they estimate it to be nearly two-thirds larger. The bulk of this difference can be explained by four differences in assumptions:
Just hours in advance of the release of Wednesday's 2015 Social Security Trustees' Report, Rep. Xavier Becerra (D-CA), Ranking Member of the Ways & Means Social Security Subcommittee, and 22 Democratic co-sponsors introduced H.R. 3150, the One Social Security Act, a bill that would merge the Social Security Disability Insurance (SSDI) and Old-Age and Survivors' Insurance (OASI) trust funds into one combined Social Security trust fund. Aimed at averting the impending depletion of the SSDI trust fund, combining the trust funds would result in one insolvency date of 2034, according to the 2015 Trustees' Report.
As one of the Fiscal Speed Bumps that Congress will need to address before the end of the session, the SSDI trust fund will be unable to pay the full amount of the program's scheduled benefits by the end of 2016. The One Social Security Act would change the structure of the Social Security trust funds, merging the disability and old-age funds into one that collects the entire 12.4 percent of payroll taxes rather than the current split of 1.8 percent to the disability fund and 10.6 percent to the old-age fund. By combining the funds, insolvency for the combined program would be in 2034, reducing the OASI program's solvency by 1 year and extending SSDI's solvency.
Following the release of the 2015 Social Security Trustees' report yesterday, CRFB has released a report summarizing the myriad statistics and projections that the Trustees published. Our report discusses the solvency of both the disability and old-age portions of the program, the long-term shortfall of the program, and how the projections changed since last year.
The report shows a similar, though slightly improved, outlook to last year for the program. The Social Security Disability Insurance (SSDI) trust fund is still projected to be exhausted in late 2016, leading to a 19 percent cut in benefits. The insolvency dates for the old-age and combined trust funds have been pushed back one year to 2035 and 2034, respectively, at which point benefits would be cut by 21 percent for all beneficiaries. The program faces a 2.68 percent of payroll shortfall, or 0.96 percent of Gross Domestic Product (GDP), that lawmakers must close to ensure solvency over the next 75 years.
Click here to read the full paper.
As our report explains, these financial issues are the result of an already-existing and widening gap between spending and revenue.
As the number of beneficiaries in the program continues to grow, outlays have already increased from 10.4 percent of payroll (4.0 percent of GDP) in 2000 to 14.1 percent of payroll (5.0 percent of GDP) today. The Trustees project they will continue to grow to 16.7 percent of payroll (6.0 percent of GDP) by 2040, dip slightly, and then grow to 18.0 percent of payroll (6.2 percent of GDP) by 2090.
Meanwhile, revenues will fail to keep up – growing slightly as a percent of payroll from 12.8 percent today to 13.3 percent in 2090, while actually falling slightly as a percent of GDP after the 2020s from 4.8 percent in 2030 to 4.6 percent by 2090.
The Social Security and Medicare Trustees have released their reports on the long-term finances of each program, showing those programs remain financially unsound and on the road toward insolvency. The reports project the Social Security Disability Insurance (SSDI) trust fund being exhausted late next year, the Medicare Hospital Insurance Trust Fund to run dry in 2030, and the theoretically combined Social Security trust funds to deplete their results by 2034.
Overall, the Trustees project Social Security to be in somewhat better health than projected last year – when the insolvency date was 2033 – but still in need of a significant course correction.
According to the Trustees, Social Security faces a 75-year shortfall of 2.68 percent of payroll (0.96 percent of GDP), meaning the payroll tax would have to be raised immediately from 12.4 to about 15 percent to ensure 75-year solvency. By 2090, the payroll tax would need to rise further to about 17 percent. Alternatively, policymakers could reduce benefits by about 16 percent today, with reductions growing to 27 percent by 2090.
CBO's Long-Term Budget Outlook, released last month, included updated projections for Social Security and Medicare, including individuals' expected benefits and taxes paid. The Social Security trust fund projections are very similar to last year's: the Social Security Disability Insurance Trust Fund is scheduled to be insolvent sometime in Fiscal Year 2017 (which starts in October 2016) and the larger Old Age and Survivor's Insurance Trust Fund is expected to run out of money in 2031. If the two programs are considered as one (if Congress reallocates funds from one to another as necessary), the combined fund will be exhausted in 2029, one year sooner than projected in last year's report.
Some information that wasn't in last year's report (but was in a separate publication on Social Security) explains that each succeeding generation will get more out of Social Security than they paid in. Individuals born in the 1940s are expected to, on average, receive $1.03 for every dollar paid in Social Security taxes. This amount increases over time, with those born in the 1980s scheduled to receive $1.40 in benefits for every $1 paid in taxes, up from $1.03 for those born in the 1940s. These amounts assume that Social Security will continue to pay full benefits even after the trust fund runs out.
The House Ways & Means Committee held a hearing last week to investigate possible changes to the Social Security Disability Insurance (SSDI) program that would encourage beneficiaries to return to work when possible. The hearing, the first on the program for the full committee since 2008, launches a larger conversation on possible improvements to SSDI as depletion of the trust fund's reserves approaches at the end of 2016.
As one of the fiscal speed bumps lawmakers must address in the 114th Congress, the impending insolvency of the SSDI trust fund presents both a need to secure additional program funding and an opportunity to make improvements to better serve the disability community and taxpayers. Some experts argue, and survey results have shown, that some SSDI beneficiaries wish to return to the workforce but are hesitant to do so because of the complexities and potential loss of benefits if they do.