September 1, 2020
In April, the Social Security Trustees issued their annual report. Their figures and conclusions are based upon last year’s experience, and do not take into account the effects of the novel coronavirus pandemic. The report for 2021 will certainly be much worse, because the high unemployment we are experiencing now must lead to a major drop in payroll tax revenue. It’s also possible that the pandemic will cause an increase in disability claims and accelerate early retirements, increasing the benefit payouts. Finally, there are serious proposals to suspend payroll taxes for a period of time, though such proposals usually include a proviso for a transfer to the Social Security trust fund from general tax revenue to offset lost collections. That is all speculative. Here is what we know for certain.
Because the American economy was strong in 2019, Social Security’s reserves increased by $2 billion during the year, reaching $2.9 trillion. Under the intermediate economic assumptions, the trust fund will be sufficient to pay full benefits until 2034. Because disability claims have fallen sharply since 2010, the disability insurance trust fund should be sufficient until 2065, which is 13 years later than last year’s projection. The combined program would go bust in 2035, at which point payroll taxes would only be able to cover 79% of promised benefits. Reserves in Medicare’s hospital insurance fund fell by $6 billion, to $195 billion at the end of 2019. This fund’s projected depletion date is 2026. During 2019, total benefits were paid as follows: $903 billion in Social Security benefits, $322 billion in Medicare’s hospital insurance, $145 billion in disability payments, and $463 billion in supplemental medical insurance. These figures might seem pretty good, but the fact is that these programs are facing difficult demographic hurdles. The Centers for Disease Control and Prevention announced that the year 2019 saw the fewest number of babies born in the United States in 35 years, just 3.745 million. That is a 1% drop from the year earlier. Except for 2014, the U.S. birth rate has fallen steadily since 2007. Accordingly, in their actuarial assumptions the trustees reduced the expected total fertility from 2.0 to 1.95 births per woman. That means fewer taxpayers paying into the system in the future as current workers reach their retirement age. The graph above shows the historical and projected trust fund ratios since 1970. At its peak in 2010, the Social Security trust fund was large enough to cover four years of benefits. Now it is less than 3½ years. The downward slopes in the graph for the years after 2020 is based upon the current demographics and cost projections, not the effects of the pandemic. That will only make it worse.
The graph also shows that the Social Security trust funds nearly ran out in 1983. In 1982 it was projected that full promised benefits would not be payable by July 1983. A commission was created, headed by Alan Greenspan, to make recommendations to head off the disaster. In the spring of 1983, just three months away from insolvency, those recommendations were turned into a bipartisan legislative compromise.
Key elements included:
• accelerating a previously scheduled tax rate increase;
• phasing in a higher normal retirement age, going from 65 to 67 (that phase-in is not yet complete);
• requiring government workers to pay into Social Security; and
• up to one-half of Social Security benefits were made potentially subject to income tax for higher income retirees.
The thresholds for taxation were not indexed for inflation, so over time more and more retirees are making these additional payments to the Social Security trust funds during their retirement.
The effects of these changes were dramatic, as the graph shows. Another key change, one not anticipated by the Greenspan commission, was the boom in women’s workforce participation in the late 1980s and 1990s. More women working meant more Social Security taxes collected, even though the benefit payouts proceeded as projected. What’s more, there is an underappreciated marriage penalty built into Social Security benefits for two-earner couples. Each spouse must choose between his or her own earned benefit, or the benefits determined by the earnings record of the other spouse. On the one hand, given that 1983 rescue plan for Social Security was achieved with only three months left before insolvency, one might think that 15 years should be plenty of time to correct the actuarial imbalances in the current system. On the other hand, the country was much less polarized in the 1980s; bipartisanship and compromise were more regular features on the national political scene. The 1983 Social Security tax increases followed 1981’s bipartisan Economic Recovery Tax Act, which had cut taxes for nearly all Americans. That may well have made the increases more palatable.