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The Economist: Is Social Security Insecure?

By By Ray Perryman
Nov. 9, 2013 at 5:09 a.m.


Whether there will be enough funds to pay for Social Security benefits in the future is a source of concern for virtually every American. In 2033, the Social Security Trust Fund is projected to run out, and headlines to this effect naturally cause extreme concern for millions. You should be both concerned about this possibility and glad that there are still 20 years to fix the situation.

In September, almost 62.9 million Americans received payments of Social Security or supplemental security income. Of those, 41.4 million were aged 65 or older, and another 14.3 million were disabled and younger than 65. The remaining 7.2 million were neither aged nor disabled, such as early retirees or young survivors. Total September payments were $67.1 billion, with average of $1,162 per recipient. Clearly, this is a crucial source of income for many people.

Social Security benefits are paid using funds from two sources: the Social Security Trust Fund and payroll taxes. There are actually two trust funds: (1) the old-age and survivors' insurance and (2) the disability insurance trust funds. (I'll call these just "the Fund" for simplicity). The accumulated assets in these accounts provide automatic spending authority to pay benefits, and they can only be used for benefits (about 98 percent of outlays) and administrative costs.

The balance in the Fund stands at just more than $2.7 trillion. In 2012, Social Security tax receipts and interest on the Fund's assets resulted in an inflow to the Fund of about $837.8 billion; outflows last year were $773.2 billion. The surplus, as with all extra funds from prior years, was added to the Fund balance. It's taken about 30 years to reach this $2.7 trillion mark. In 1982, the Fund was essentially dry, and Congress had to pass emergency measures to allow for loans (normally banned by law) to pay benefits. In 2000, the Fund balance stood at just more than $1 trillion. The $2 trillion mark was passed sometime in 2006.

During the 2006-08 time frame, the net increase in assets was exceeding $185 billion per year, but the increases have dropped off sharply since then. One reason is that Social Security taxes are directly tied to economic performance. During the downturn in 2010 and 2011, receipts declined, though they bounced back in 2012 as the economy continued to recover. As long as the economy keeps growing, the total income will also trend upward (though as the baby boomers move from peak earning years to retirement in record numbers, there will be some dampening effect). In addition, by law the Fund is invested in special securities backed by the U.S. government (to be sold as needed), which earns some interest.

The other side of the net assets equation is benefits paid, which is where the problem lies. Looking at the total U.S. population by age, the large baby boomer generation's progress through various age groups is very clear. The oldest of the generation are reaching retirement ages now, and the pace will pick up for another 15 years or so, when the numerically largest age groups (in their early 50s now) begin to draw benefits. This large bulge in the population has been a major driver of growth in the Fund balance through its payroll tax payments, and the tide will turn when the boomers begin to draw out payments instead.

In 2010, costs (benefits paid) exceeded income from taxes (excluding interest) for the first time. The Social Security administration estimates that in 2021, costs will exceed total income (including interest). If things keep going as they are now, by 2033, the trust fund will be gone.

Even when the Fund is gone, however, there will be income coming in from taxes, and some benefits can be paid. By law, money can't be borrowed (though emergency measures are always a possibility), which leaves just two options: reducing benefits paid or raising taxes collected. Current estimates indicate that in 2033, benefits would have to drop by 23 percent, or taxes would have to rise by 33 percent. Obviously, the economic damage would be extreme if we get to 2033 without a plan in place to avoid such a scenario.

Given that there are 20 years to work with, we do have options. Some tactics have already been implemented, such as encouraging people to wait to begin receiving benefits by bumping up monthly amounts for delaying. The amount of income subject to payroll taxes has ratcheted up. Ideas to partly privatize retirement savings have also been debated. Privatizing has some appeal in terms of personal control and the ability to earn returns higher than the Fund (which typically earns less than 1.5 percent), but risks would have to be carefully controlled.

The answer to the problem is likely to involve some combination of moves to push out the Fund's demise so it can continue to be used to get through the demographic challenge we will be facing. These things (slowing benefit growth or speeding tax collections) will not be popular, and dysfunctional Washington will have to step up to the plate and deal with it. The sooner action is taken, the less burdensome that action will be.

Dr. M. Ray Perryman is president and chief executive officer of The Perryman Group (perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

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