The new Social Security Trustees Report has just been released. As always, it contains a wealth of information about the Social Security retirement and disability programs, and Medicare, and is well worth reading. There are two startling facts in the report.
First, this year for the first time since 1982, the combined retirement and disability parts of Social Security (OASDI) is running a deficit, and it will continue to do so throughout the 75-year projection period. Its outlays now exceed its tax revenue and the interest on its trust funds.
Second, in the face of these impending and growing deficits, the system is promising to raise benefits faster than inflation, promising real benefit increases of over 160 percent over the next 75 years. Upper-income recipients could be getting as much as $87,303 a year, in real 2018 dollars, when they retire in 2095 (and more for married or two-worker couples). These benefits would require more than a four percentage-point hike in the payroll tax for all workers, including lower-paid workers, to balance the system. Instead of remaining a social safety net, focused on keeping the elderly out of poverty, the program is set up to give huge raises to people of all income levels, even as the generations get richer over time. It is threatening to take over the bulk of personal retirement saving and pensions, retarding investment and economic growth, and holding down wages.
The Short-run Financial Issue, and the Sad Truth About the Trust Funds
OASDI is the combined Old Age and Survivors Insurance program, OASI, and the Disability Insurance program, DI. Its current tax revenue (payroll taxes and income taxation of benefits, plus interest on the trust funds) is now less than its current outlays. The system is still authorized to pay full benefits, up to the OASDI trust fund amounts, so there is no immediate threat to recipients.
The OASI and DI trust funds reflect past surpluses in the system, but those monies were used as they accrued in the past to pay for other government spending. Any outlays currently “covered” by the trust funds require money from other sources. Therefore, using the trust fund authority means that the Treasury will have to borrow or use general revenue to pay a portion of the benefits. Medicare Part A (Hospital insurance or HI) has been running deficits for some time, and has been drawing down its trust fund spending authority for several years. The OASI trust fund spending authority will be used up by 2036, and the DI trust fund by 2032, by which times the Social Security Administration (SSA) will need more spending authority from Congress to continue to pay full benefits. The HI trust fund will be exhausted by 2026, and Medicare will need new funding before then.
An Unrealistic Benefit Formula Drives Perpetual Deficits
Benefits at all levels of income – lower than average, average, and above average or at the maximum covered earnings – are set to grow forever in line with wages. As wages double in real value over time (the actuaries assume this by about 2070), so will promised real benefits. As wages grow by more than 160 percent by the end of the trustees’ planning period in 2095, real benefits will grow by more than 160 percent. For example, single workers earning medium lifetime earnings over their working lives, and who retire today in 2018 at the normal retirement age[i], are projected to receive $20,662 in annual benefits. Medium wage earners retiring in 2095 will receive $53,724 in annual benefits, in 2018 inflation-adjusted dollars, 160 percent more real purchasing power than today’s retiring workers’ benefits, and almost as much as today’s total average family income just from Social Security. Add 50 percent for a spousal benefit, and double that for a two-worker medium income couple, and it is easy to see why the system’s costs are rising.
Workers who always earned the maximum covered earnings, and who retire this year, are projected to get $33,428 in annual benefits; those who retire in 2095 are projected to receive $87,303, in real 2018 dollars. Add 50 percent for a spousal benefit for a married couple, $130,955, or up to double these numbers for a two-worker household, $174,606. The richest households could receive as much as two or three times the current average household annual income, just from Social Security.