Putting Social Security’s financial outlook in perspective

When the Social Security Trustees released their long-delayed annual report late last month, they announced that the combined retirement, survivor and disability reserves would run out in 2034 — a year sooner than projected in the previous year’s report. Considering that it was the first report to include the impact of the pandemic-induced recession, many Social Security watchers breathed a sigh of relief that the news wasn’t worse.

“Although the Trustees assert that Covid-19 and the ensuing recession had ‘significant effects’ on Social Security finances, it’s hard to see much of an impact in the report,” Alicia Munnell, director of the Center for Retirement Research at Boston College, wrote in a new report, Social Security’s Financial Outlook: The 2021 Update in Perspective.

The biggest reasons for the one-year acceleration in the projected date for the depletion of the trust fund included fewer births than expected in 2020; a 1% decline in the level of gross domestic product as a result of Covid and the accompanying recession; updates to projections of initial benefit claims; and moving the 75-year valuation period ahead by one year.

The 75-year deficit in the 2021 Trustees Report is the largest since 1983, when Congress enacted major legislation to restore balance to the federal retirement and disability program. Social Security moved from a projected 75-year surplus of 0.02% of taxable payroll in the 1983 Trustees Report to a projected deficit of 3.54% of payroll in the 2021 report.

That means that if payroll taxes were raised immediately by 3.54 percentage points — roughly 1.8 percentage point each for the employees and the employers — the government would be able to pay the current package of benefits for everyone who reaches retirement age through 2095.

“The bottom line is the 75-year deficit has increased, and it is not primarily due to Covid,” Munnell wrote. “At the same time, Social Security has once again demonstrated its worth during these tumultuous times when — in the face of economic collapse — it continued to provide steady income to retirees and those with disabilities.”

Not everyone was so sanguine about the trustees’ report.

“To call the newly released 2021 annual Social Security Trustees’ Report alarming would be a gross understatement,” Charles Blahous, a former public trustee for Social Security from 2010 through 2015, wrote in a recent article published in Barron’s.

“Only in a federal capital paralyzed by dysfunction would such a report fail to galvanize lawmakers to move immediately to rescue this most vital of all federal programs,” he wrote. “Urgent action is necessary to maintain Social Security in its current form.”

Social Security’s costs started to exceed its income from payroll taxes back in 2010. Since then, the government has been tapping the interest on the trust fund assets to cover benefits. Starting this year, taxes and interest are expected to fall short of annual benefit payments, forcing the government to start drawing down the trust funds until they are exhausted 13 years from now.

The increase in costs is driven by demographics, specifically the drop in the total fertility rate after the baby boom. The combined effects of the retirement of baby boomers and the slow-growing labor force due to the decline in fertility reduce the ratio of worker to retirees from about 3:1 to 2:1 and raise costs commensurately. In addition, the long-term increase in life expectancy causes costs to continue to increase even after the ratio of workers and retirees stabilizes.

“The depletion of the trust fund does not mean that Social Security is bankrupt,” Munnell wrote. “Payroll tax revenues keep rolling in and can cover 78% of currently legislated benefits initially, declining to 74% by the end of the projection period” unless Congress acts before then.

Andrew Biggs, a Social Security scholar who served in the Social Security Administration during the George W. Bush administration, argues that it’s unlikely that Congress would allow the nation’s largest federal spending program to cut benefits to more than 65 million beneficiaries.

Biggs noted that in 2016, Congress transferred funds from Social Security’s retirement program to keep benefits flowing. Then last year, Congress passed an $80 billion-plus bailout of the underfunded multiemployer pension plans.

“So if Congress wouldn’t cut benefits for the disabled or for union members, what is the chance Congress will allow large, across-the-board benefit cuts for Americans who paid into Social Security for decades? Not very large, and I’m willing to wager my own retirement security on that,” the 58-year-old wrote in an opinion piece on MarketWatch.

The bigger danger, Biggs said, is that Social Security’s rising costs threaten to squeeze out other government priorities, such as health, education and infrastructure, as Congress scrambles to find ways to keep Social Security solvent for future generations.

The expected 6% increase in Social Security benefits next year due to rising inflation could also affect trust fund depletion.

“Usually, inflation does not have a significant impact on Social Security finances because benefits and payroll tax revenue go up in lock step in response to rising prices,” Munnell wrote. “But this year things are different.”

Benefits will increase as a result of a host of Covid-related price hikes, but it appears that payrolls are not rising commensurately. Munnell estimates that the cost of living adjustment could shift the trust fund depletion forward by three months.

Questions about Social Security rules? Find the answers in Mary Beth Franklin’s 2021 ebook at MaximizingSocialSecurityBenefits.com.)

The post Putting Social Security’s financial outlook in perspective appeared first on InvestmentNews.

Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.

Andrew Vincent
Andrew is half-human, half-gamer. He's also a science fiction author writing for BleeBot.
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