July 11, 2016

Social Security Insolvency Is Now One Year Closer

Jason J. Fichtner

Former Senior Research Fellow
Summary

In fact, the Social Security crisis is not only real; it is already upon us. The trustees now estimate that the 75-year financial shortfall for the combined trust funds is $11.4 trillion in present-value terms. If we indefinitely extend past the 75-year period, the so-called "infinite horizon," the shortfall is a whopping $32.1 trillion. For comparison, our nation's gross domestic product is slightly over $18 trillion – and our gross national debt (not including unfunded liabilities) at the end of June is $19.3 trillion.

Contact us
To speak with a scholar or learn more on this topic, visit our contact page.

The 2016 Social Security Trustees report showed a continuation of the current trend toward insolvency of both of its trust funds. The Trustees estimate that Social Security's combined retirement and disability trust funds will become exhausted in 2034, the same as reported last year. Regrettably, the lack of change in the combined trust funds' insolvency dates has lulled some into a false sense that the program's finances are now stable. Please don't be fooled.

While the trust funds depletion date is unchanged, this simply means that Social Security's day of financial reckoning is now one year closer — and less than 20 years away. Social Security faces severe, urgent financial challenges that policymakers must soon address if we are to ensure the program remains viable for the most vulnerable in our society.

In fact, the Social Security crisis is not only real; it is already upon us. The trustees now estimate that the 75-year financial shortfall for the combined trust funds is $11.4 trillion in present-value terms. If we indefinitely extend past the 75-year period, the so-called "infinite horizon," the shortfall is a whopping $32.1 trillion. For comparison, our nation's gross domestic product is slightly over $18 trillion – and our gross national debt (not including unfunded liabilities) at the end of June is $19.3 trillion.

It's important to understand that there are actually two separate trust funds: one for the retirement program (the Old Age and Survivors Insurance, or "OASI"), and one for the disability program (the Disability Insurance, or "DI"). 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 about three-fourths of scheduled benefits. For the disability program, the Trustees estimate the program will hit insolvency in 2023 — less than a decade from now.

Note that the projected insolvency date for the disability insurance trust fund has changed from last year's report. The DI trust fund was on path to run out of money this year, which would have spurred an automatic 20% cut in benefits. But in November 2015, Congress passed and the president signed the Bipartisan Budget Act of 2015 (BBA). As I wrote in aMarketWatch column, the improvement in the DI trust fund was primarily due to a temporary reallocation of the payroll tax rate — with a little less of your payroll taxes going into the retirement trust fund and a little more going into the disability trust fund.

For calendar years 2016 through 2018, an additional 0.57 percentage points of the total 12.4% payroll tax is reallocated from the retirement program to the disability program. In 2019, the payroll-tax allocation between the two trust funds will revert back to their pre-2018 split (See Table 6, page 13). But taking from one Social Security trust fund to backfill another is just robbing Peter to pay Paul; it doesn't fix the underlying problems with the disability program, and reforms are still necessary.

In short, the Social Security Trustees have once again sent a clear warning that the Social Security crisis is real, of a staggering magnitude, and already upon us. We can't afford to wait or to become complacent; doing so will only ensure that the changes necessary to shore up Social Security's retirement and disability programs will be far larger and more difficult than if policymakers made the necessary reforms today.

Within the past several months, nonpartisan research organizations have released reports with their recommendations for reforming Social Security. The Committee for a Responsible Federal Budget (CRFB) released a book on ways to reform the disability insurance program that brought together experts from across the political aisle and included both academics and practitioners. A more expansive project sponsored by the Bipartisan Policy Center (BPC) suggested policy reforms to improve retirement security and personal savings. The BPC report includes reforms to Social Security that would put the program back on a secure financial footing by making changes to both benefits and taxes.

Time is running short to make the necessary improvements to the Social Security programs. While further legislative changes to the programs are unlikely this calendar year, 2017 will usher in a new president with a new political and economic agenda. Hopefully, the next President will take the responsible path and choose to make Social Security reform a top priority. (I can dream, can't I?)

Note: Here are the web links for the Trustees Reports for Social Security and Medicare, and for the summary of both reports.