Mark Miller
(Reuters) – What if traditional wisdom about how to fix Social Security is no longer true?
Trustees who oversee the program released their annual financial forecast Monday, predicting that the pension and disability trust fund’s combined reserves will be exhausted in 2035, a year later than predicted last year. The improvement is due to recent strong economic and wage growth, which has accelerated payroll tax payments that fund the program. However, the program will be insolvent in 2035.
This may sound like Social Security won’t have any money to pay benefits at all in 2035. But what the report does mean is that the Social Security Trust Fund’s huge reserves – currently $2.78 trillion – will be exhausted before the program generates enough money. cash at that time to pay only 83% of the benefits promised to current and future beneficiaries. This would be equivalent to a 17% reduction in benefits.
Benefit cuts of this magnitude are highly unlikely. This will create immediate and severe hardship for seniors and people with disabilities, and it is difficult to imagine any member of Congress wanting to explain this result to voters.
Conventional wisdom says there are only a few ways to solve the problem: We can raise the payroll taxes that fund the program, cut benefits, or do a combination of the two.
But the closer we get to insolvency, the less benefit cuts can be implemented in a way that addresses the immediate problem. And solving the income problem becomes more complex—at least if the goal is to satisfy Social Security’s legal requirement to project solvency over a 75-year period. The payroll tax increases required to achieve this goal at the time of insolvency would be so large as to likely be politically infeasible.
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Polls have long shown that the public supports raising taxes as a way to keep Social Security solvent and benefit levels.
Democrats, including President Joe Biden, support raising taxes on the wealthy to restore solvency. They also propose modest increases in benefits. Republicans in Congress oppose raising taxes and support cutting benefits through raising the retirement age and means testing. Donald Trump typically says he won’t touch Social Security, although he has mentioned possible benefit cuts and his advisers are considering cutting payroll taxes. Leaving the program intact is not a policy decision, as it points to the aforementioned 17% benefit cut.
If Democrats win the U.S. election in November, raising revenue could be a solution, said Nancy Altman, president of Social Security Works, a progressive advocacy group that advocates for expansion. “If Democrats come forward this fall to expand Social Security and win on that issue, they can push for it and force a vote.”
Martin O’Malley, the newly appointed Social Security Commissioner, hopes a solution can be found. “I’ve met with many members of Congress, and my feeling is that no one particularly wants to play chicken with a program that is so important to so many seniors and people with disabilities,” he told me in an interview Monday. .
But if the impasse on the issue continues, Congress may well turn to another solution to prevent insolvency and benefit cuts: an emergency infusion of general government revenues.
“If you had asked me 20 years ago, I would have predicted a solvency solution that would leave the current system intact, but I no longer think that will happen,” said Charles Blahouse, who was one of two state Social Security trustees. and Medicare from 2010 to 2015. A conservative, he now researches pension issues at George Mason University. “But barring a political miracle and a lot of leadership, I now think we’re heading toward a blanket bailout.”
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This would be a profound turning point for the social security system, which has always been self-financing. The program is funded primarily by a payroll tax, currently 12.4%, divided equally between workers and employers. It is also financed by smaller amounts of interest income earned on trust fund bonds and taxation of benefits.
HOW MATH WORKS
The logic behind the overall revenue decision is simple. Even if there is consensus on some benefit cuts by the bankruptcy date, the math simply doesn’t work out because of the magnitude and timing of the cuts needed.
“You can’t make a 25% cut overnight because it would have a terrible impact on the incomes of current beneficiaries,” said Paul N. Van de Water, a senior fellow at the Center on Budget and Policy Priorities, a progressive think tank. . “And phasing out smaller volumes over a longer period of time does not solve the short-term problem.”
Increasing total income would mean that Social Security would – for the first time – increase the country’s debt burden as money would be borrowed. The shift could also put Social Security in the same boat as other federal programs subject to annual appropriations from Congress for things like food and housing.
But Van de Water is more optimistic about the implications of using general revenue to fund the program. “Social Security has become quite popular and entrenched over the years, so it is unclear how much the presence of any unearmarked funding would reduce the strength and support of the program.”
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Unfortunately, this likely game of brinksmanship will only lead to concerns expressed by many Americans about the future of Social Security. If you are among those who are worried, Van de Water has some words of comfort.
“Despite the uncertainty, it is very unlikely that Congress will allow full Social Security benefits to be withheld,” he said. problems, but they will be solved.”
The views expressed here are those of the author, a columnist for Reuters.