Trustees of the Social Security Trust Funds will soon release their annual report on the state of the program on which millions depend. That analysis is late at this point, and augurs to reshape how voters see the system.
In their last April 2020 report the experts predicted that Social Security should generate enough cash to pay scheduled benefits into 2035, at which point seniors would experience a 21 percent reduction in payable benefits. Believe it or not, that possibility is not a worst case scenario. Instead, it is an assessment of what might happen in a robust economy unaffected by pandemic.
In November, following the elections, the actuaries of the Social Security Administration issued an update because they believed it would be misleading to provide estimates regarding the prospects for solvency of the trust funds for proposals without recognizing the economic impact of the pandemic. Under the new set of assumptions, the system would lose a year of solvency.
In other words, someone who turns 74 today should reasonably expect to outlive the system’s ability to pay scheduled benefits.
Again, these are not guarantees. These forecasts are a look into how the program might perform in a relatively growing economy, one that has moved past the uncertainty of the pandemic. This isn’t the type of stability on which most of us want to rely.
Inflation a big threat to the system
Those interim projections are now well past their use-by date. The key risk to the program right now is inflation. While many seniors look forward to the annual COLA, it means unforeseen expenses for the program. The forecast mentioned above assumes that inflation would be 1.65% in 2021 and it appears headed above 6 percent.
Inflation is a serious problem for Social Security because expenses for the program grow by prices, whereas revenue grows by wages. When wages are rising faster than prices, everyone is happy because benefits are rising in real terms. When prices are rising faster than wages, the system tends to unravel.
For example, back in 1978, the program had a reserve in the Trust Fund large enough that it could pay scheduled benefits for 50 years. Less than 5 years later, the program was within months of reducing benefits because the reserve was essentially gone despite all of the money generated by Boomers entering the workforce.
There are additional structural challenges for the program created by COVID that have drawn little concern in the mainstream media. While coverage has worried about the level of payroll taxes that have been collected, COVID hurts the program’s performance through immigration, fertility and interest rates that will feed into the numbers over the coming decade.
Moreover, things were not going well for the program prior to COVID. The unfunded liabilities of the system are growing at twice the rate of the economy, and have reached nearly 80 percent of the nation’s GDP. The primary cause of the deterioration is the passage of time. According to the Social Security Administration, Congressional inaction on the program’s finances since 1983 is responsible for about two-thirds of the system’s shortfall.
This is the cost of doing nothing. Last year, the lack of action meant the program generated $600 billion in unfunded liabilities. Next year will be more, and more the year after. The reason is fairly simple. We look at Social Security over a period of 75 years (present value). Every year we move the calendar forward on the valuation date, thereby trading a low-cost year in the present for a very high-cost outer year. Moreover, the present value of imbalances grows larger as the obligations move closer in time.
Consider the problem of doing nothing. When President Trump arrived in the Oval Office, the program had a shortfall of 12.5 trillion. When the 2021 Report is released, the figure is apt to rise above $17.4 trillion. In that time frame, the program collected less than $4 trillion in revenue. So if benefits had been cut to zero on the day that Trump arrived, the program would still have been in worse shape on the day he left.
The record on Social Security over decades is not any better. For every $1 that the system has collected, it has generated nearly $2 of promises that no one expects it to keep. To state the obvious, that can’t go on forever. Yet, America cannot even have a discussion about it.
Then there’s the insolvency of Medicare
And this takes us back to the state of the system, one that has been in legislative hibernation for nearly four decades. Social Security does not act in a vacuum. When the policy experts say that benefits can continue undisturbed for 14 years, it is an economy that does not have an insolvency of Medicare to solve. It is an economy unaffected by seniors choosing to collect benefits early in order to front run insolvency. It is an economy unaffected by seniors losing more than 20 percent of their benefits.
The most worrisome news about Social Security in the coming weeks may be that COVID has pushed the insolvency of Medicare forward in time forcing the public to absorb higher taxes for the cost of social insurance. This is going to happen when a portion of those voters would like to expand Medicare to themselves. This is a risk that is not even on the radar of policy experts on the left.
For those worried about Social Security, there is nothing more worrisome than the release date of the Trustees Report. It suggests that policy makers and those on the Hill believe that this year, like the last 40, is not the time to think about this issue. It is the same story that we have time to deal with this issue when the passage of time is basically programmatic cancer.
Brenton Smith of Atlanta has written on the Social Security issue for publications ranging from Forbes to Market Watch.
