June 25, 2013

Keep Up the Pressure to Save Social Security

Jason J. Fichtner

Former Senior Research Fellow

We can't afford to become complacent. We need to keep up the pressure on Congress and the president to act and reform Social Security.

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The recently released 2013 Social Security Trustees report generated very little attention, presumably because the top line numbers didn't change from the 2012 report.

As with last year, the Trustees continue to estimate that the combined retirement and disability Social Security Trust Funds will become exhausted in 2033, just 20 short years from now.

Not only was the 2013 report shrugged off as no big deal, but the New York Times editorial board went so far as to say that Social Security's financial shortfall "isn't a crisis" and "is a manageable problem." This complacency sends a false sense of security to the public and policy makers that the financial problems facing the Social Security program aren't drastic and aren't urgent. Don't be fooled. Social Security faces severe financial challenges and we must act urgently if we are to protect those that are most vulnerable in our society.

While the often reported 2033 insolvency date applies to the combined trust funds, recall that legally there are two separate trust funds; one for the retirement program and one for the disability program. For the retirement program, the Trustees estimate that the trust fund can continue to pay full benefits until 2035, at which point the program will only be able to pay out about three-fourths of scheduled benefits. For the disability program, the insolvency date is much, much sooner — 2016. The disability trust fund's financial shortfall is more immediate and, if reforms aren't adopted soon, disability beneficiaries could see a 20% reduction in benefits once 2016 arrives.

The Trustees now estimate that the 75-year financial shortfall for the combined trust funds is $9.6 trillion in present value terms. That's a lot of money! If we indefinitely extend past the 75-year period, the so-called "infinite horizon," the short fall is a whopping $23.1 trillion. Keep in mind, our nation's gross domestic product is approximately $16 trillion — and our gross national debt (not including unfunded liabilities) is $16.7 trillion.

As bad as those numbers are, the commonly reported figures for trust fund insolvency are based on "intermediate assumptions" — not too high, not too low — the Trustees also calculate high- and low-cost assumptions. Social insurance experts are well aware that the high-cost projections of Social Security's future don't represent a worst-case scenario — the combined trust fund insolvency date under the high-cost assumptions is 2027, just 14 years from now. Many of these same experts nonetheless claim that the worst-case future for Social Security is that promised benefits would have to take a 25-percent haircut if the trust funds go insolvent in 2033. Though a 25-percent reduction in benefits is scary enough, it is possible that Social Security's finances could be catastrophically worse.

Consider, for example, a chronically sluggish economy that causes the gross domestic product to continue to fall well short of current projections, unemployment to stay high along with attendant increases in disability rates. Further, if fertility rates continue to decline or we continue to live longer, Social Security's financial problems also increase. Throw in a cure for cancer and the result will be Social Security beneficiaries seeing far more than a 25-percent cut in their benefits.

I recently testified before the Ways and Means Committee of the U.S. Congress on Social Security reform proposals. My testimony focused on the Social Security program's incentives — specifically, how the current structure provides disincentives to work and save — and discussed how Social Security reform, if done correctly, can increase U.S. savings, labor force participation, economic growth, and federal revenues. As I testified:

"Social Security faces real financial challenges. Dismissing the real and current fiscal challenges facing the Social Security system and kicking the 'reform can' further down the road will only increase the severity of the burden associated with reforms when they inevitably must take place. In order to ensure that Social Security remains solvent and continues to provide retirement security for generations to come, while minimizing the burden on current and future generations, reforms must happen sooner rather than later."

And I'm not alone in sounding the urgency alarm — all the Trustees (including Treasury Secretary Lew and HHS Secretary Sebelius) agree with me:

"Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare."

We can't afford to become complacent. We need to keep up the pressure on Congress and the president to act and reform Social Security.

Note: If you don't want to read the entire Trustees Reports for Social Security and Medicare, two good summaries are offered by Charles Blahous, one of the two Public Trustees for Social Security and Medicare.