Yesterday, the Social Security trustees released their annual report detailing what happened to the program in 2016, and forecasting the financial future of the program.
As has been the case for a number of years, the size of the crisis grew, while the consequences drew a year closer. Behind the scenes there are two positives that may get lost in the discussion. The Social Security Disability Income (SSDI) system showed strong improvements that may in fact have led to advances in the system’s short-term outlook.
The most closely watched statistics remain roughly the same. The combined reserves of the program are projected to be exhausted in 2034, at which time the system could 77 percent of scheduled benefits. That means that a typical person turning 69 this year expects to be alive when the consequences arrive.
Social Security’s Deficits are Large and Growing
The trustees believe that unfunded liability rose nearly 10 percent to $12.5 trillion. That sum reflects the amount of money that we would need to invest today in order to fill the gap between expense and revenue over the next 75 years. In other words, the system generated more in unfunded liabilities over 2016 (nearly $1.2 trillion) than it collected in combined revenue (~$950 billion)
Other Ways to Say $12.5 Trillion
The trustees typically express this sum in two additional ways to help the public understand the cost of addressing this gap. According to the trustees we could increase require Social Security’s portion of payroll taxes of 2.83 percent, meaning a payroll tax of more than 18 percent. Alternatively, Congress could achieve solvency purely through a roughly 17 percent cut to all beneficiaries.
What Caused the Growth of Pain
The drivers of the increase in the program’s unfunded liabilities over 2016 were the passage of time and the Affordable Care Act (ACA).
The passage of time added about $500 billion in unfunded liabilities. The current rate of growth, the program will add nearly $2 million of broken promises in the two minutes that it takes to read this piece.
The ACA has two potential impacts on Social Security. First, improving care may lengthen life expectancy – always a concern. The other affect, which tends to be more visible though, is higher wages. The Trustees have assumed since 2010 that slower the growth in the cost of group health insurance would translate into historically high wage growth. Now the Trustees believe that the savings are less favorable.
Amid the numerical wreckage, there were two bright spots that may not draw the attention that they deserve. SSDI, which I generally do not cover showed strong improvement with the exhaustion point changing from 2023 to 2028. The number of disability beneficiaries has been falling for a number of years, last substantially.
The other positive is that the program’s cashflow improved by two years, meaning that the system should be able to pay scheduled benefits without selling bonds from the Trust Fund until 2022.
It is practically boilerplate at this point: The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually, giving workers and beneficiaries time to adjust to them.
Brenton Smith writes on all aspects of Social Security reform, translating the numbers and jargon of the issue into terms that everyone can understand. His work has appeared in Forbes, MarketWatch, Fox Business, The Hill, and a number of regional newspapers. To read more of his reports — Click Here Now.
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