Late last month, the Congressional Budget Office (CBO) released its updated projections for Social Security (see “CBO’s 2016 Long-Term Projections for Social Security”). Long story short: CBO believes that the consequences are larger, arrive sooner and tend to be much more expensive to fix than the public typically believes. Those expectations are generally formed based on the estimates of the Trustees for Social Security Trust Funds, which are more widely reported.
Nonetheless, both forecasts are legitimate and well founded. So it is reasonable to view these estimates as book-ends for the discussion about Social Security, where CBO provides the conservative end and Trustees are the more optimistic.
The combined estimates provided by the Trustees and the CBO essentially say that we can expect Social Security to pay full benefits for 12 to 17 years. Once the trust funds are exhausted, experts believe that cuts will range between 20 and 30 percent.
CBO believes that the cost to fix Social Security is nearly double the projected remedy suggested by the Trustees. The figure 4.68 percent of payroll means that payroll taxes would rise to 20 percent – assuming that Medicare does not push the figure higher.
Why are the estimate different? In simple terms, CBO expects the system to generate less revenue and spend more money.
For CBO’s explanation of the differences between CBO’s long-term Social Security projections and those of the Social Security Trustees, (see Congressional Testimony of CBO Director Hall )
This trend is magnified by the interest earned on the Trust Fund. In 2029, CBO expects the combined Trust Funds to reach zero. Going into 2030, the Trustees believe that Trust Funds will hold roughly $1.6 trillion in resources which over the following 4 years will earn a ballpark $400 billion.
There are six basic take-aways from the CBO report.
Take Away 1: There is a crisis coming
Both agencies agree that Social Security is moving towards a crisis with a degree of mathematical certainty. They really only disagree about the speed at which the calamity is moving.
Take Away 2: We do not know the time or size of the crisis
Both agencies agree that the business of forecasting is not an exact science. Again, it is wise to look at these projections in a range, not with a calendar.
Take Away 3: This isn’t just about those under 40 anymore
Both agencies expect existing retirees to live long enough to absorb benefit reductions. If CBO is correct about half of those turning 75 this year can expect to be alive when the system pays depleted benefits. When you look at both reports, people reaching retirement normal age today should expect to face benefit reductions for 3 to 8 years in retirement.
Take Away 4: Fixed doesn’t mean fixed
Younger Americans watching the public policy of the program need to consider that effectiveness of any proposal is measured by data from the SSA which offers a much more forgiving threshold for success.
When the SSA says that a proposal makes Social Security solvent for 75 years, it may be wrong by a factor of 2.To illustrate this problem, the trustees in 1984 believed that the changes to the system enacted in the 1983 reform would enable the system to meet its obligations for 75 years. A decade later, that forecast had dropped by 40 years.
Take Away 5: The National Bank of SS Is Closing Forver
During the term of George W. Bush Jr, the nation’s added about $5 trillion in incremental national obligations – a little less. About $1.4 trillion of that financing came from Social Security. In other words – Social Security was the best customer of the United States Treasury.
Between 2009 and present, the government spent nearly $10 trillion that it didn’t have. Social Security’s contribution to paying that bill fell to about $400 billion. Basically, Social Security’s played a marginal role in paying the nation’s bills.
As Donald Trump enters the White House, the nation owes roughly $20 trillion. No one expects Social Security to pay any of these bills. Soon enough, the system’s total revenue will force the system to redeem bonds held in trust to pay its bills.
In other words, Social Security will transition from being the best customer of the United States Treasury to a direct competitor. To illustrate, if you owned say a shoe store, you would worry about losing your best customer. Here the problem is exponentially worse. Your best customer is leaving you to open his own shoe store right next door to yours.
Take Away 6: The Price Tag On The Worker Is Rising
For my generation of workers, people paid a fixed percentage of wages and that tithe took care of not only existing retirees but left a little something in the Social Security Trust Fund to pay me when I retire.
Today a worker contributes a larger share of wages on a larger portion of wages to the system where nothing left over. Beyond the payroll tax collections, workers will see a growing share of their general fund taxes used to repay the “something” that was left over from my contribution paid in the 1980s. This is the crowding-out effect that policy analysts warn about.
Understand, my generation grumbled about payroll taxes even though the actual cost of the program was less. Future workers will contribute more and likely get back less for contributions. They aren’t going to grumble less.
Economic researcher Brenton Smith of Atlanta can be reached at brentoncsmith@yahoo.com
