We think it might be possible we won't have enough money in the future.
Let's make it official!
I've been getting some feedback from this post in which I (and others) made fun of the current logic that says we must cut social security benefits now because the projections show that there might not be enough money to provide full benefits later. People seem to be a little bit confused by it which I understand: sure, in an everyday sense, cutting back in order to save a little bit for tomorrow makes some sense. The problem with this logic in terms of social security is that they are selling it as a solution when in fact it's simply throwing up our hands and accepting our fate. As Paul Krugman pithily explained:
"It’s probable (although not certain) that, within two or three decades, the Social Security trust fund will be exhausted, leaving the system unable to pay the full benefits specified by current law. So the plan is to avoid cuts in future benefits by committing right now to ... cuts in future benefits. Huh?"
I think the confusion partly stems from the fact that people are under the misapprehension that the system is going to go bankrupt in a couple of decades and so it might make sense to them to take some bad medicine now in the hopes that there will at least be something there in 2035 or so. But that's simply not the case. The social security system is solvent, it's just that in a couple of decades they project that we will have exhausted the extra money the baby boomers have been contributing since 1983 for the trust fund (they'll all be retired) and there will be a little bit less coming into the system through the payroll tax than will be going out in benefits. This means that if we simply never look at the numbers until the day that happens we could potentially have to cut benefits by some number yet to be decided. But the fact is that the government does have to do some planning and so it's useful to know if the dedicated funding stream for Social Security might be short for a period of time as the pesky baby boomers make their way through the system. The question is, how do we handle that?
First let's be clear about these projections.They are exactly what they sound like: estimates. And it's fairly obvious that estimates made decades ahead of time are probably little better than guesses. Indeed, the projections have been all over the place for the past couple of decades due to the ups and downs of the economy during that period.
Moreover, there are actually three projections, a low, a medium and a high. Here is what the Social Security Board of trustees say about them:
"The intermediate demographic and economic assumptions shown in table II.C1 reflect the Trustees' best estimates of future experience, and therefore most of the figures in this overview depict only the outcomes under the intermediate assumptions. Any projection of the future is, of course, uncertain. For this reason, alternatives I (low-cost) and III (high-cost) are included to provide a range of possible future experience."
"Significant uncertainty surrounds the intermediate assumptions."Indeed. It's possible that these projections will turn out to underestimate the scope of the problem, but they are just as likely to overestimate the scope of the problem. It's not as if they have a crystal ball. But you'd never know that by the caterwauling of politicians on both sides of the aisle who seem to believe that Armageddon is nigh and we must immediately cut benefits lest something even worse happen down the road. (What do they know that we don't know? Soylent green?)
The sad fact is that Social Security has been so successfully demagogued over a period of decades that a misinformed bipartisan consensus has formed demanding they be seen to be "doing something" about this problem (which may not be a problem and which is far down the list of current issues needing attention.) It's also likely to be the case that the austerity caucus has succeeded in pushing even the skeptics to accept that cutting something is inevitable, so some otherwise level headed types are leaning toward cutting Social Security in the long term in order to avoid cutting something else in the short term and pushing the economy back into recession. It's a devil's bargain either way.
It is not written in stone that the funding stream can never be changed or that the economy will never be any better than what the "intermediate projection" says it will be. But if you want to really reform Social Security there are plans on the table. Unfortunately, they are not plans that are even in circulation among the political establishment, which seems to have embraced the notion that this wealthy nation can no longer afford for its elderly population to live in dignity.
For instance, The Alliance for Retired Americans has endorsed legislation
introduced in the House by Representative Ted Deutch and in the senate by Senator Mark Begich which would solve both the problems of increased economic hardship for seniors and the potential shortfall of 2035:
The the Protecting and Preserving Social Security Act, S. 308. makes several essential changes to Social Security. First, it revises the cost of living adjustment (COLA) formula so that future COLAs will more accurately reflect the spending patterns of older Americans. (Retirees spend more resources on health care, housing, and energy costs than the general population.) Adjusting the COLA formula to the CPI-E, immediately helps Social Security recipients meet their daily needs. In addition, it gradually phases out the earnings cap on wages. The current cap has fallen well below historical levels. It has become a tax loophole that could impact the long term financial stability of the Social Security Trust Fund.
They have made the obvious observation that not only shouldn't benefits be cut, they should be raised. The elderly aren't exactly living high on the hog. The median income for Social Security recipients is about $35,000 a year. And as the excerpt above points out, these are people who are not squandering those vast riches on caviar and champagne --- they're spending a huge amount of their income on health care. (I don't know if people are aware --- old people get sick more than others. And Medicare does not pay for everything.) The CPI-E (as opposed to the Chained-CPI) is likely to more accurately measure the cost of living for the elderly and, therefore, should at least be studied and modeled more thoroughly before we start cutting benefits for an already low income population. (Seriously, what in the world are these people thinking! 35k a year is not a lot of money!)
Then there's the fact that all the other pension streams are proving inadequate. Atrios wrote a good piece on this issue for USA Today a few weeks ago which concluded with this solution:
It is almost universally accepted in policy circles and in the pundit class that strengthening Social Security involves cutting future benefits relative to what current law promises because according to current projections, Social Security only has the ability to pay promised benefits in full until 2033, and then 75% of them thereafter. The basic thinking is that we must promise to cut benefits now so that we won't necessarily have to cut them 22 years from now. What?
Imagine if that is how we treated defense spending. Since it appears budgets will be tight in the 2030s, best to mothball all those aircraft carriers today. Who would buy that argument?
The reality is that we will make our defense decisions about the 2030s in the 2030s. That's just how we should treat federally financed retirement programs. We never actually have to cut benefits if we make the policy choice to keep funding them.
Social security is only bankrupt to the extent that our political leaders lose the will to invest in a decent retirement for American workers.
As the system exists, large numbers of Americans nearing retirement will have little more than fairly meager Social Security benefits (the average benefit for retired workers is currently $1230) to survive on in their old age. We can doom them to a life of insecurity and relative poverty or we can take the obvious step to improve their lives: Increase Social Security benefits.
The goal of a retirement system should be to ensure that retired people have sufficient income to live out the remainder of their lives without a radical reduction in quality of life after they stop working. Our current system, a modest mandatory government retirement program combined with individual savings, is failing to do that.
Strengthen Social Security now, not by cutting benefits, but by increasing them.
What he said.
By the way, if you don't know how the "Social Security trust fund" was constructed, this definition by Mark Thoma is the best one I've seen:
Starting in 1983, the payroll tax was deliberately set higher than it needed to be to cover payments to retirees. For the next 30 years, this extra money was sent to the Treasury, and this windfall allowed income tax rates to be lower than they otherwise would have been. During this period, people who paid payroll taxes suffered from this arrangement, while people who paid income taxes benefited.
Now things have turned around. As the baby boomers have started to retire, payroll taxes are less than they need to be to cover payments to retirees. To make up this shortfall, the Treasury is paying back the money it got over the past 30 years, and this means that income taxes need to be higher than they otherwise would be. For the next few decades, people who pay payroll taxes will benefit from this arrangement, while people who pay income taxes will suffer.
If payroll taxpayers and income taxpayers were the same people, none of this would matter. The trust fund really would be a fiction. But they aren't. Payroll taxpayers tend to be the poor and the middle class. Income taxpayers tend to be the upper middle class and the rich. ... When wealthy pundits like Krauthammer claim that the trust fund is a fiction, they're trying to renege on a deal halfway through because they don't want to pay back the loans they got.
Considering this reality, the best way to deal with a projected shortfall in dedicated Social Security funding is to raise the cap on payroll taxes so that those who make higher wages have to pay the same percentage as those who don't. That's the least politically toxic approach I'd guess, although even that is a heavy lift. But they must try. That percentage has eroded significantly over the years and bringing it back up to where it was would go a long way to ending this sham crisis.
Think Progress has a very good treatment of the problem with "projections."