Click here to read the original paper on the cost of delay for Social Security
The Social Security Trustees recently showed what it would take to make Social Security solvent over 75 years: immediately raise everyone’s taxes by over 2.8 percentage points, immediately cut everyone’s benefits by 17 percent, or cut benefits for new beneficiaries immediately by 21 percent. They also warn that those costs will go up substantially if our leaders in Washington procrastinate. Indeed, waiting until 2033 will increase the needed adjustments by 50 percent. As they explain:
If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2033.
The Trustees make clear that there are two costs to waiting.
In the recent Social Security Trustees report, the issue of same sex marriage made a surprising appearance. Without calling much attention to it, the Trustees assume that all states will eventually legalize same-sex marriage. And while this would increase spending somewhat, they estimate the financial impact would be minimal.
Rep. John Larson (D-CT) earlier in the summer unveiled his plan to reform Social Security, a plan that has now been evaluated by the Social Security Administration's Office of the Chief Actuary (OACT). The reform would fully close Social Security's 75-year shortfall and about three-quarters of the 75th year deficit, meaning that it would ensure 75-year solvency but not sustainable solvency.
First, thank you. It is tremendous to see a Member of Congress addressing Social Security’s challenges with real fixes. As we have pointed out, the longer we delay, the harder those fixes will be.
The plan is certainly a useful contribution to the debate, recognizing not only the magnitude of the changes that will have to be made to close Social Security’s gap, but also that increasing scheduled benefits, as the plan does, will require significant revenue increases that go beyond just higher taxes on the wealthy.
- Raise the payroll tax rate by 2 percentage points to 14.4 percent, phased in over 20 years
- Apply the payroll tax to income above $400,000 unindexed (the current taxable maximum would catch up around the mid-2040s due to indexation) and credit benefits for that income through a special lower "AIME+" benefit factor
- Increase the income threshold for the taxation of Social Security benefits to $50,000/$100,000
- Increase the lowest PIA factor in the benefit formula from 90 to 93 percent
- Use the faster-growing CPI-E for cost-of-living adjustments (COLAs)
- Create minimum benefit of 125 percent of the poverty line for people who have worked 30 years or more
- Invest one-quarter of the trust fund in equities
- Re-allocate revenue to the DI trust fund to keep it solvent
As we have discussed numerous times, the Social Security program is on an unsustainable path, and its combined trust fund will be depleted within the next 20 years. If Congress does not act to reform the system, all beneficiaries will see a 23 percent benefit cut upon the exhaustion of the funds. The Disability Insurance portion of the fund is in more immediate danger: it is expected to be insolvent by 2016, triggering an immediate 19 percent cut in disability benefits.
On Tuesday, Ben Ritz of the Concord Coalition published an article entitled "Impending Crisis Should Force Action on Social Security in the Next Congress." He warns of the looming insolvency and details a commonly offered but insufficient solution to the issue:
The release of the Social Security Trustees Report just two weeks after CBO released its long-term outlook gives us a good opportunity to compare how the two reports differ in their projections. Overall, CBO anticipates Social Security will be in greater financial trouble than the Trustees do, forecasting an exhaustion date for the combined trust fund three years earlier in 2030 and a 75-year actuarial shortfall that is more than one-third higher. But there is more going on here than meets the eye.
Specifically, CBO projects a 75-year actuarial shortfall of 4 percent of taxable payroll compared to the Trustees' figure of 2.9 percent; as a percent of GDP, these figures are 1.4 and 1 percent, respectively.
The Social Security Trustees Report showed a largely similar outlook compared to the report last year, though it was slightly worse. Trust fund exhaustion dates were similar other than the date for the separate Old-Age and Survivors' Insurance (OASI) fund, which was brought forward one year to 2034. In addition, the 75-year actuarial shortfall increased slightly from 2.72 percent of taxable payroll to 2.88 percent, largely the result of changes in economic assumptions and shifting the 75-year period over one year.
As a percent of payroll, the change is entirely concentrated on the spending side, but this appears to be more a factor of payroll shrinking than nominal dollar spending increasing. Social Security revenue is the same at 13.9 percent of payroll over the 75-year period, while spending is 0.2 percentage points higher than last year at 16.8 percent.
Looking back further, as we noted in our analysis of the report, the outlook for the program has deteriorated in each of the last four reports. Below, we show the assets in the trust fund over time as projected in the 2010, 2012, and 2014 Trustees reports.
While the change in Social Security projections this year is relatively small, there are some interesting sources for those changes, some of which may have implications for future changes in Trustees forecasts.
The recent CBO Long-Term Budget Outlook confirmed that our long-term debt problems remain far from solved, with debt projected to exceed the size of the economy within 25 years. Federal spending, especially the mandatory portion of the budget, will continue to outpace revenue collected, running up debt and interest payments on that debt. Spending on Social Security and health care programs will grow by almost half from 9.8 percent of GDP today to 14.3 percent of GDP by 2039. Two factors are reponsible for major portions of the increase in mandatory spending: an aging population and "excess cost growth," when health care costs are growing faster than the rest of the economy.
On Tuesday, the Committee for a Responsible Federal Budget hosted an event titled "Decoding the Social Security Trustees Report" to discuss the Trustees' latest update on Social Security's finances and policy options to reform the program. The event featured Social Security Chief Actuary Stephen Goss, Reps. Tom Cole (R-OK) and John Delaney (D-MD), and a panel discussion moderated by Damian Paletta of The Wall Street Journal.
In late May, Representatives Tom Cole (R-OK) and John Delaney (D-MD) introduced the Social Security Commission Act of 2014, reflecting a bipartisan effort to extend the solvency of the Social Security program and make it more sustainable over the long term. On Monday, July 28, Committee for a Responsible Federal Budget President Maya MacGuineas joined Jim Kessler of Third Way, Andrew Biggs of the American Enterprise Institute, and Robert D. Atkinson of the Information Technology and Innovation Foundation in signing a letter in support of the bill.
According to the recent Social Security Trustees Report, the growing gap between spending and revenue will lead to trust fund exhaustion in the next 20 years. At that point, all beneficiaries will see a 23 percent cut in benefits if Congress does not act. The letter touched on this looming insolvency:
There is widespread recognition across the political spectrum that Social Security, on its current path, will be unable to pay full benefits to disabled beneficiaries in 2016 and to retired and survivors of American workers in 2034 (2033 under a combined Trust Funds scenario). For many American families, these would be catastrophic events.