January 21, 2022

How safe is Social Security?

econography

January 5, 2022

How safe is Social Security?

Through
Amin Mohseni-Cheraghlou

Capitol Hill had a lot on its plate in the final months of 2021. In addition to infrastructure and social spending bills, the government shutdown and debates about raising the debt ceiling were some of the most pressing issues that kept lawmakers busy all fall. In the final days of 2021 and after a few political clashes around the issue, Congress narrowly approved a $2.5 trillion increase in debt limit – Senate 50 to 49 and House 221 to 209 along party lines – as it has done about 80 times in the last 60 years. The reason is simple: if I hadn’t, it would have been: devastating for both the US and the global economy.

In the words of Secretary Yellen, failure to raise the debt ceiling and a subsequent US government default would mean that “in a matter of days, millions of Americans could be strapped for cash… Nearly 50 million seniors could stop receiving Social Security checks for a while. Troops can go unpaid. Millions of families who depend on the monthly child discount could be delayed. America, in short, would default on its obligations… A default could cause a spike in interest rates, a sharp drop in stock prices and other financial turmoil,” and economic chaos at the global level.

Raising the debt ceiling will undoubtedly be good news for over 64 million recipients of Social Security benefits, who will continue to receive their checks on time for another year. However, raising the debt ceiling year after year cannot effectively address the mounting challenges facing the social security system. The future looks bleak for retirees, disabled seniors and their families. The Old Age, Survival and Disability Insurance Program (OASDI), more commonly known as Social Security, is experiencing financial difficulties and is estimated to just 12 years old.

Social security struggles with financing crisis

Social Security cash flow has been negative since 2010. That means the program has paid out more Social Security benefits than it has collected in Social Security taxes as large cohorts of the baby boom generation retired. As a result, the US Treasury borrowed from financial markets to redeem securities of Social Security trust funds. Estimates suggest that the program’s cash flow will remain negative for the next decade, leading to the depletion of the current Reserves of $2.9 Trillion in the next decade.

Once the reserves run out, the benefits are: capped at the level of social security taxes received on an annual basis. Without major reforms, eligible beneficiaries — more than 80 million retirees, survivors of deceased workers, and disabled workers and their families — will be less than 10 years old in just 10 years. 79 percent of the planned social security benefits they were promised. The longer-term outlook is even grim: the 75-year present value of the Social Security and health care fiscal projection shows a $26.7 trillion and $54.9 trillion deficit.

The financial problems of the Social Security and Medicare systems stem primarily from an aging population and declining employment-to-population ratio in the United States. Over the past two decades, the proportion of the population aged 65 and over has increased from 12 to 17 percent, while the proportion of people aged 0-14 – future employees – has fallen from 22 percent to 18 percent (Figure 1). Over the same period, the employment ratio fell from 65 to 59 percent — 61 percent before the start of the COVID-19 pandemic (Figure 2).

Delaying major reforms will only exacerbate the crisis and increase the cost of future reforms

The cost of doing nothing will only increase the longer Congress delays reforming social security systems. In 2010, Social Security trust fund trustees estimated that reserves would be exhausted by 2037 and that the 75-year deficit was equal to 1.92 percent of the wage bill. Just ten years later, in 2020, the exhaustion date was reduced to 2034 and the 75-year deficit was equal to 3.21 percent of the wage bill (Figure 3).

Given the aging population, longer life expectancies and retirements, fertility rates below the replacement rate, and declining employment rates in the United States, substantive reforms must be implemented immediately. A combination of the following reforms would make the social security system sustainable:

  • Increase in social security tax rates: The Social Security tax rate is currently set at 12.4 percent and is split equally between employee and employer. Estimates for fiscal year 2020 indicate that an increase of three percentage points payroll tax would cover the fund’s deficit for the next 75 years.
  • Raising or abolishing the income ceiling for social security tax: Currently, Social Security taxes are paid on incomes up to $142,800. In other words, in 2021 only 84.5 percent of all income will be subject to Social Security tax, compared to about 90 percent of all income in 1982. Collecting Social Security taxes on 90 percent of all income would reduce Social Security’s 75-year funding gap by approximately 20 per cent. In addition, if all income were subject to Social Security taxes, the program would remain solvent for more than 40 years.
  • Raising retirement age: Currently, the full retirement age (FRA) is between 66 and 67 years, depending on an employee’s year of birth. However, current social security rules allow employees to receive retirement benefits from age 62 (early benefit age or EEA). Raising the FRA and EEA by three months a year until age 69 would disappear 26% of the system’s projected deficit over the next 75 years.
  • Increase in the number of employees: With a stream employee-beneficiary ratio of 2.6, the social security system faces negative cash flow — a employee-beneficiary ratio of 2.8 is needed to keep the system solvent. This ratio is expected to fall further, to 2:0 by 2060, pushing the system into serious crises. Therefore, any effective social security reform agenda must reverse this trend or, at the very least, reduce the downward pressure on the worker-beneficiary relationship. While immigration can help to some extent, there are other options. Attracting more workers to the workforce through the implementation of worker- and family-oriented policies — such as high-quality and affordable early childhood education and childcare programs — is a more effective way to reverse the downward trajectory in the employee-beneficiary ratio.

Public opinion varies considerably on Social Security reform, making system changes a challenging and politically charged topic in Washington. However, lawmakers on Capitol Hill have only a few years to restore the balance and longevity of the system. Let us not forget that current deficit estimates are based on normal scenarios and do not take into account the negative shocks of future recessions, natural disasters and crises such as the current pandemic, which are estimated to Social Security Expiration Date Reduced by Four Years. Congress must act now.

Image: Social Security Administration sign on field office building. SSA is an independent agency of the US federal government that administers Social Security – San Jose, California, USA – 2020

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