Social Security's looming $32 trillion shortfall
Originally posted on CNBC – we thought this was a very relevant topic.
You can look at the financial health of Social Security in many ways.
Social Security’s total income is projected to exceed its total cost through 2019, as it has since 1982. After 2019, interest income and money taken out of reserves will provide the resources needed to offset Social Security’s annual deficits until 2034.
By then, if Congress does nothing, the federal government will collect enough in payroll taxes to pay about 75 percent of scheduled retirement benefits until 2090.
The Social Security Administration projects that unfunded obligations will reach $11.4 trillion by 2090. That’s up $700 billion from the $10.7 trillion the administration projected for its 2089 shortfall.
Despite the huge numbers, there’s even a less generous way of looking at the fiscal shortfall.
A projection, known as the “infinite horizon,” takes into account all the program’s future liabilities, even those beyond the 75-year period that Social Security actuaries typically use in their calculations.
Under the infinite horizon, Social Security will have $32.1 trillion in unfunded liabilities by 2090, $6.3 trillion more than last year’s projection. (See the chart below.)
“We’re not broke in 20 years to 30 years, we’re broke now,” Kotlikoff said. “All the bills have been kept off the books by Congress and presidential administrations for six decades.”
The $6.3 trillion increase in the infinite horizon projection shows that Social Security Administration actuaries are more pessimistic about economic and wage growth, Kotlikoff said.
A reduction in the interest rate used to make calculations under the infinite horizon projection from 2.9 percent to 2.7 percent was the main contributor to the rise in the unfunded obligations forecast from last year, according to the trustees’ report.
“You can’t hide the numbers under a bunch of malarkey,” said Kotlikoff, who is running for president as a write-in candidate.
Kotlikoff had an influential ally in his quest for better accounting for Social Security and other federal programs. In 2013, Sen. Tim Kaine, the Democratic Party’s vice presidential nominee, co-sponsored bipartisan legislation that would require the federal government to use infinite horizon calculations and so-called fiscal gap accounting, which considers the difference between the government’s projected financial obligations and the present value of all projected future tax and other revenue. The bill, which Kotlikoff championed, did not pass.
Presidential candidates from the two major political parties have yet to present detailed plans for how they will address Social Security’s shortfall.
Hillary Clinton said she won’t cut Social Security benefits and will expand the program, especially for widows and people who have left the workforce to take care of children, spouses or relatives.
She plans to ask “the highest-income Americans to pay more, including options to tax some of their income above the current Social Security cap and taxing some of their income not currently taken into account by the Social Security system,” according to her campaign website.
Currently, earnings up to $118,500 are taxed for Social Security benefits. Eliminating the cap this year would mean the trust fund reserves would be depleted in 2055 instead of 2034, according toestimates from Karen Smith, a senior fellow in the Income and Benefits Policy Center at the Urban Institute.
Clinton opposes “any attempts to gamble seniors’ retirement security on the stock market through privatization.” However, investing a portion of Social Security’s trust fund assets in stocks would likely reduce the need for higher payroll taxes without disrupting the capital markets, according to a recent analysis by the Center for Retirement Research at Boston College.
Donald Trump has said he wants to preserve Social Security, saying the key to do so is to have “an economy that is robust and growing.”
Stronger economic growth may delay Social Security’s insolvency, but it would not fix its underlying fiscal problems, according to Smith’sresearch.
So what would have a big impact on Social Security’s fiscal standing if you don’t cut benefits? Raising payroll taxes. Smith found that increasing payroll taxes by 3 percentage points from 12.4 percent — half paid by employers and half paid by employees — to 15.4 percent would make Social Security reserves last at least 53 years longer, or until 2087.
Few politicians are proposing that fix for future generations.