On April 23, the Trustees of the Social Security Trust Fund released a “troubling” report, "Projected Trust Fund Exhaustion Three Years Sooner Than Last Year". This report is the fifth disappointing report in a row. The media has picked-up the normal static in headlines that seize eye, but provide articles that entirely miss the point: What is the future of Social Security?
What we see are optimistic assumptions, and words that can be misunderstood. From what we see on the internet, it appears that many writers have reached the wrong conclusions. 2033 isn't really a hard date.
“The projected point at which the combined Trust Funds will be exhausted comes in 2033 – three years sooner than projected last year.”
It is important that the reader understand that this projection is a best case scenario. The Trustees assume that individual parts of Social Security can collapse without affecting the other parts of the system. The Trustees project that the insolvency forming in the Disability Fund will shave 2 years off of the solvency for the Old-Age Survivor Trust Fund. But there is no mention of how the insolvency of medicare in 2024 will impact the Old-Age Survivors fund.
2033 is really an academic date. Social Security does not exist in a vacuum as the Trustees portray. Social Security consists of three separate systems, Old-Age and Survivors, Disability, and Medicare. All three are heading for insolvency. You and the Trustees should focus instead on the first date of insolvency because these systems are connected.
All three feed on the same taxbase, payroll taxes. 2024 is the key date – that is when the Medicare Trust Fund is projected to reach an insolvent state. In 2024, the nation will either pull payroll tax resources away from the other two programs or we will have to redefine the concept of Medicare benefits. If the nation decides to raise taxes to shore up the Medicare system, it will have to divert tax base away from deficit control. It is misleading to suggest that the Old-Age and Survivors Insurance system will be immune to that debate.
“After trust fund exhaustion, continuing income is sufficient to support expenditures at a level of 75 percent of program cost for the rest of 2033, declining to 73 percent for 2086.”
The statement is based on a rather dubious economic assumption. The Trustees assume that future workers will contribute to Social Security at the same rate as today. They assume that future workers will accept the benefit reduction as well as the increased parental support without voting for payroll tax reductions. It is to say the least a generous assumption. In doing so, the Trustees assume that a vast majority of Americans will vote against their own self-interest. This assumption has no basis in historical precedence or economic theory.
$103 billion in reimbursements from the General Fund of the Treasury—almost exclusively resulting from the 2011 payroll tax legislation
The Trustees do not fully disclose the size of support Social Security receives from the General Tax Payer. In addition to the $103 billion that the system received in 2011, it will receive roughly 112 billion in 2012. Beyond direct subsidies, Social Security enjoys support like the Earned Income Tax Credit which reimburses some low-wage workers for payroll taxes. Without this support, the system would lose more than a trillion dollars of solvency.
This is what is important to understand. Social Security is failing today. The general tax payer is the backstop - and the backstop is already in play. Support from the general taxpayer is like a spare tire on your car. There is only one spare tire, and the Trustees seem willing to depend upon it.
The projected actuarial deficit over the 75-year long-range period is 2.67 percent of taxable payroll -- 0.44 percentage point larger than in last year’s report. Over the 75-year period, the Trust Funds would require additional revenue equivalent to $8.6 trillion in present value dollars to pay all scheduled benefits.
The “75-year long-range” statistics are virtually worthless, quoted mostly to present the system in its best light.
The problem with 75-year statistics is that it includes all of the revenue, but only a fraction of the costs associated with the program. When the government accepts payroll taxes, the system makes an implied promise to pay future benefits. The cost of those promises is not fully included in the 75 year figures. For someone born today, for example, the numbers count 49 years of revenue, but only 8 years of cost. The working years fall inside the 75 year period, but only 8 years of benefits fall inside the 75 years. The statistics can in fact count 49 years of revenue and not a penny of cost for the majority of workers.
This is why the 75-year shortfall is 8.6 trillion and the real shortfall is over 20 trillion.
