From Social Security Public Trustee Charles Blahous:
Today e21 published my guide to the latest Social Security trustees’ report (the full report can be found here, a summary here, and a video of our press conference here). The following day I testified on the report (my testimony here and video here). The Social Security report is one of two such annual reports, the other covering Medicare, which I will summarize in my next piece for e21.
Excerpts from today’s summary:
Social Security’s Disability Insurance Fund Faces Depletion in 2016: The DI fund is projected to be depleted in two years, in the fourth quarter of 2016. Unless the law is changed disability payments will drop suddenly by 19 percent. Some have suggested the impending DI fund depletion is appropriately handled by reallocating taxes between Social Security’s trust funds. This suggests a misdiagnosis. OASI actually faces a bigger shortfall than DI. The main reason DI is hitting the wall first is that the baby boomers are moving through their years of peak DI incidence before converting to retirement. While lawmakers may include interfund borrowing or a temporary tax reallocation as part of a comprehensive solution it would be counterproductive to enact either as a standalone policy, if it served to facilitate continued delay of needed reforms.
Social Security’s Financing Shortfall May Soon Be Insolubly Large: The shortfall has grown far beyond its size during Social Security’s 1982-1983 crisis. It was then saved from insolvency by a last-moment bipartisan rescue. The measures required were intensely controversial. We are already at a point where an agreement would require the left to accept benefit restraints roughly twice as large as in 1983, and the right to accept tax increases twice as large—unless either gives even more ground. There is no assurance of such an agreement. If the problem grows politically insoluble, Social Security’s financing structure must eventually be abandoned. This would most likely require permanent financing from the general fund. Gone would be the program’s contribution-benefit link, and the conception of Social Security as an “earned benefit.”
The Problem Reflects an Excess of Obligations to Those Already in the System: As this table shows the shortfall consists entirely of an excess of scheduled benefits over contributions for people already in the system, not from any inadequacy of contributions by future workers. To the contrary, those now entering the workforce stand to pay far more than they will receive—by 4.4 percent of wages—irrespective of whether the system is balanced by assessing them with higher taxes or lower scheduled benefits. The only way to prevent these income losses for younger generations is to slow benefit growth for those already in the system.
We Didn’t Much Change our Long-term Outlook, but the Short-term Problem is More Urgent: We made only minor changes to our long-term assumptions.
We Made Some Presentational Improvements: We changed our benefit illustrations to eliminate confusion caused by earlier reports. Many had misinterpreted these as indicating that “benefits replace about 40 percent of preretirement earnings” on average when this was not the comparison made. Lacking a universally agreed-upon method of calculating replacement rates, we simply removed the misunderstood measure.
Overall, this year’s report shows us a critical year closer to a Social Security financing crisis, with the certainty of its resolution increasingly in doubt.