(MINNEAPOLIS) – Social Security is not about to collapse, it will not go bankrupt and disappear, and it will be around for decades – unless it is intentionally destroyed. That’s very different than what you regularly hear, and might be different than what you think will happen. A closer look at this signature U.S. government program will show it is in better shape than many think.
How it works
Social Security, or more formally the Old-Age, Survivors, and Disability Insurance (OASDI) program, is not like an IRA or other retirement accounts where your contributions determine your pension. Instead, current workers and employers pay into the system, and retirees and the disabled receive payments from it. What you get out of it is not directly determined by how much you paid in.
Running a surplus
It may surprise some to learn that Social Security runs a surplus each year. Prior to the recession of 2008 that surplus was well over $100 billion a year. The recession has made a dent in its financing, and in 2010, for the first time since 1983 the annual surplus was maintained only because of interest earned on the accumulated surplus from previous years. The cumulative surplus, kept in the Social Security trust fund, now stands at around $2.4 trillion. The primary risk to that surplus continuing is the aging of the population.
Changing demographics
An oft quoted statistic is the ratio of those working (contributing to the system) and those on benefits. In 1940 that ratio was 160 to 1. Over time, the ratio has declined as baby boomers moved into retirement and the birth rate declined. Regularly you will read that the ratio in the future will be 2 to 1. That sounds like an impossibly big change to manage. But what is less noted is that the ratio in 2010 was 2.9 to 1 – and the system is still running a surplus.
Obviously any statement about the future is a prediction based on a set of assumptions. The Social Security Administration has an elaborate and publicly reviewed process for setting these assumptions, and for revising them on a regular basis. Last year, their “Technical Panel on Assumptions and Methods” published a detailed review and assessment of what assumptions to use. The future financial status of Social Security is tied to a number of factors including how long people live, how many children they have, when they retire, how fast the economy grows, how many people become disabled, how many immigrants there are, inflation, interest rates, and of course, changing rules for the program’s taxes and benefits.
These assumptions are grouped together into three scenarios for the future that are basically best case, worst case, and a best estimate of what will happen. These scenarios assume that the economy slowly recovers (and improves S.S. finances) but that the actuarial factors dominate the future status of the fund.
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The first milestone: surpluses give way to deficits
According to the 2011 Trustee’s report in 2025 the expenses of Social Security will exceed the income to the trust funds even including interest earned and from that year on the trust fund balance will start to decline.
What happens then? You will hear that the trust fund is a myth, just “pieces of paper” and that the money “has already been spent.” That is misleading, but not entirely irrelevant. The trust fund is invested in U.S. Treasury Bonds, which are in general regarded as just about the safest investment we have. Private investors who want to be very conservative invest in these.
What does matter is that overall surplus or deficit of the SS Trust Fund subtracts or adds to the overall deficit of the Federal Government. At the moment, and for years to come, this isn’t a very significant issue. $100 billion is a small fraction of the nearly $4 trillion federal budget. Were it to become a significant factor it might affect the cost of financing the federal deficit or impact interest rates generally.
The second milestone: the Trust Fund is exhausted
After running deficits for a time, the trust fund will be used up. In 2011 the Trustee’s estimated that would occur in 2038. In 2007, they estimated that date to be 2042. The change from 2042 to 2038 was the impact of the recession: fewer people working, more people taking retirement.
So, is this the date Social Security vanishes, meaning that today’s 40 year old will have nothing to count on? No, not at all. Money will still be coming into Social Security and that is estimated to be enough to provide about 75% of normal benefits.
So that is the “crisis” facing Social Security: in 26 years, a 25% cut in benefits. Compared to nuclear war, the oceans rising to wipe out beach front property or the next massive terrorist attack, it doesn’t sound like Armageddon.
Different futures
Remember that all these estimates are just that: the “best guess” of a group of very serious professionals who’ve done a great deal of work to arrive at these predictions. How well have they done? In 1997 the Trustees estimated that the trust fund would be exhausted in 2029. So in 1997, the date was 32 years off, before the recession it was 35 years off, and in the middle of the worst economic crisis in 50 years it is 27 years off. Perhaps in ten more years it will still be 30 years off.
How can that be? Because we do better than the “best guess” estimate. Things have worked out just a bit better than the trustees predicted. In fact, under certain optimistic assumptions about the future, the trust fund never runs out of money, but that is not very likely.
Changing the future
Of course, the decisions we make now can change the future. Certain changes could help postpone these milestones further into the future. More of our earnings could be taxed (only the first $106,000 is now), the tax rate could be increased, the retirement date could be slowly increased by a year or two, benefits could be held constant for a few years and not increase with inflation. If the economy takes off in a robust recovery all these estimates get significantly better.
The values behind Social Security
It seems hard to escape that conclusion that the talk of Social Security being in crisis is motivated by something other than pure numbers. The brief talk earlier in the Republican presidential campaign that it was a “Ponzi scheme” – a fraud – was widely dismissed as hyperbole. But other attacks have been more persistent. Some would just prefer a system where we each took care of ourselves and resent the idea that their money is used to pay for others. Some think the system should be declared unconstitutional as an infringement on personal liberty.
Part of assessing Social Security is not simply the numbers; it is also the values that underpin the program. Do we value and respect elderly? Would we feel ashamed if anyone in our country who had worked their entire life had to live in poverty in their declining years? Do we think that someone who is disabled should be taken care of as part of our collective responsibility?
Ultimately the Social Security program is a statement that we are not simply self-sufficient nor do we think of ourselves as isolated individuals. It is a belief that we gained something from our parent’s generation and that we owe them something in return.
The real threat to Social Security would be if we decided to change our view of the importance of these values.