Last week, the Social Security Trustees released the 2020 Report which provides insight into the state of America’s largest federal program: Social Security.
According to that analysis, the program’s Trust Funds are projected to reach depletion in 2035, at which point beneficiaries would face a reduction of benefits of more than 20 percent. On the surface, these two measures aren’t terribly different from those reported last year.
At a time when most Americans are experiencing some kind of economic uncertainty, that type of stability is a welcome relief. The new forecast, however, did not take into account the economic impact of the COVID_19 pandemic which has sent more than 30 million Americans to the unemployment rolls. In other words, the forecast from the trustees is less of a measure of what we can expect to happen with this troubled program and more of a fond look back on what might have happened in better days.
In all honesty, it might be relatively easy to dismiss the new assessment entirely as stale data, and say we will wait-out another year to get a better picture of how the COVID_19 pandemic will reshape the program. It is possible, but it is a serious mistake. This report has at least three items that should draw the attention of lawmakers and voters as well.
Record Growth in Shortfalls
The trustees concluded that the cost to address the shortfall of the system grew by a record amount of $2.9 T to $16.8T. That increase does not include any impact caused by the economic fall-out of the pandemic.
The main culprit in the deterioration of the system’s finances was a change in the outlook on wages. The trustees now believe that the economy will not deliver the wage growth that have been used in past reports. Specifically, the analysis concluded that rising healthcare costs would take up a greater portion of what workers get paid.
Existing Policy Proposals Are Obsolete
These results will change the political campaigns approaching on the horizon. By the time that we get to next November, the things that may have sounded like solutions in 2019 will tend to come-up short in 2020. Campaign promises will face new and larger hurtles for preserving the system as it is.
Moreover, some of the standard policy options will lose effectiveness. Specifically, plans that generate cash from the elimination the wage cap will find less extra revenue once the new assumptions become the public standard for success. To illustrate, the actuaries reported that this policy option would have solved roughly an estimated 66% of the 75 year solvency picture based on last year’s assumptions. In the coming year, that policy option will be measured against a financing gap that is 15% larger. Moreover, the levy would over time draw revenue from a smaller wage base than was previously anticipated.
At this point, proposals that seek to expand Social Security depend upon this policy option as a staple for revenue. The new report means that these candidates will need to cast a wider tax net to solve the financing gaps, much less pay for more benefits.
Benefit Cuts Start in 2022, not 2035
The problems of Social Security are not far in the future. It is broken today, and will start delivering painful results to those about to retire in the next few years.
To understand the imminent challenges for Social Security requires some background on the program’s history. It has largely been on auto-pilot since the 1970s. At that time, Congress passed legislation that allowed the program to create its own benefit increases and expand its tax base every year based on the changes in “average wages.” To illustrate, the amount of wages subject to payroll taxes rose from 132,900 in 2018 to 137,900 this year because “average wages” rose 3.62 percent in 2018. The point of these automatic determinations was to enable Social Security to adjust itself to reflect the generally improving standard of living.
If average wages fall 25 percent, the worries about 2035 will manifest themselves today for a select group of beneficiaries.
That legislation clearly did not anticipate that “average wages” might fall because such an event would translate into significant benefit cuts for some voters relative to other beneficiaries. In the current economic conditions, people who turn 60 this year will experience a significant benefit reduction that last a lifetime. To illustrate, Andrew Biggs of the American Enterprise Institute reports that a 15 percent decline in average wages would translate into a 13 percent reduction in benefits, costing a typical retiree more than $70,000 over his or her retirement. So the discussion of benefit cuts are 2 years away rather than 15.
It is easy to see that the Social Security has lost relevance in the media. A lot of Americans believe that the trustees have guaranteed them that the consequences of inaction are more than a decade away. In any other year, this report would have re-enforced that indifference to the questions about the program’s solvency. Now, the pandemic serves to remind us that 2035 is not a guarantee of what will happen. It is a stark warning about what might have happened even with the economy booming.