The US is back gearing up for an election season, so one topic already in the news is the solvency (or lack thereof) of Social Security. Each party will attempt to blame the other for the survivability of this long-standing entitlement program and why it is in jeopardy. And they’ll both claim something needs to be done immediately to save the program.
After all, in the Social Security Board of Trustees’ Annual Report to Congress, they conclude the combined assets of the Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) will be depleted in 2033, one year sooner than projected in 2022. The report suggests that without any changes to Social Security-and presuming the underlying economic forecasts underpinning tax revenue estimates are right—the system will only be able to pay approximately 77% of scheduled benefit payments after 2033.
But before panic sets in, let’s consider how dubious these assumptions are and that both the economic assumptions and program structure are changeable (and have been changed before).
Accurate forecasting on any topic is clearly difficult, particularly when looking out a decade. You can see this in past long-term governmentally produced forecasts, which are frequently so far out in left field they are nothing more than sensational fiction. What’s more, when was the last time the government ever successfully forecasted a looming recession? Baked into any forecast produced by any government body are a lot of assumptions, typically assumptions handed to them by politicians. What isn’t included in these forecasts is any analysis of whether the assumptions are at all reasonable.
Just because the government’s long-range forecasts are often (or always) faulty doesn’t guarantee Social Security’s solvency. Legislative changes will undoubtedly be needed at some point. So, let’s explore a bit of the history and structure of the program to identify details often unexplained to taxpayers providing windows of opportunity for change.
Social Security’s trust funds are funded by tax dollars, specifically Federal Insurance Contributions Act taxes, or FICA, for short. Social Security collects these taxes from 182 million workers yearly and distributes benefits to about 66 million individuals. 85 cents from each tax dollar paid fund current benefits. The other 15 cents go into a “trust fund” used to pay people with disabilities and their eligible family members.
Now, contrary to some beliefs, these trust funds are by no means a “lockbox.” They’re not even a passbook savings account. By law, surplus funds are lent to the federal government through purchases of special-issue Treasury bonds for its general use. That means the money is spent. Which means the current workers’ payroll taxes fund the benefits of today’s retirees through a pay-as-you-go system (the previously mentioned 85 cents), not liabilities. The US is not borrowing to fund these payments. So, when today’s young workers reach retirement age and are ready to collect benefits, their children and grandchildren, the workers of tomorrow will fund their Social Security benefits. (One reason why future Social Security “liabilities” (payments due under the present program) are not, by any workable definition, debt.)
But this pay-as-you-go system also raises fears tied to demographics that beneficiaries will become too numerous for workers to support. Particularly as the “Baby Boomers” move further into retirement. But what’s rarely discussed is that the Boomers aren’t the largest generation in the US; the Millennial Generation (Gen Y) is more populous by a few million. So, combining Generations X and Y provide nearly 140 million working-age people who will contribute payroll taxes to support the Baby Boomers’ benefits. Moreover, discussions of the long-term demographic impacts often leave out Generation Z (68 million, born 1997 – 2012), now starting to enter the workforce, immigration, and naturalization.
But if that isn’t sufficient to maintain the program, Congress isn’t powerless to change aspects of Social Security. While some suggest politicians don’t have the political guts to do it, Congress has previously made 17 alterations. OF those, Amendments made in 1956, 1961, 1962, 1965, 1972, 1977, and 1983 all were aimed at retaining Social Security solvency. Many times, these changes seemed ultra-minor. But small changes can have a bigger effect than anticipated.
For example, prior to 1972, benefits weren’t automatically indexed for inflation. That year, amid a debt ceiling debate, Congress passed legislation providing for a one-time 20% boost to Social Security benefit levels and enacted an inflation index based on CPI.
The 1972 Cost of Living Adjustment indexed not only prices but also wages. Congress felt this maintained the purchasing power of benefits already awarded (price-indexing) and accounted for future entrants’ higher wages. But this also gave new entrants double credit, resulting in skyrocketing benefit costs. At the time, the Trustees estimated Social Security would be unable to fully cover benefits by 1979.
To combat the declining Social Security trust fund, in 1977, Congress passed, and President Carter signed legislation fixing the “double indexing” error (among other small changes). No doubt, folks were upset about what they perceived as lost benefits. But ultimately, the changes went through, and Social Security did not run insolvent in 1979.
Looking forward, similar solutions (widely known on Capitol Hill) could be enacted. In fact, as the Congressional Budget Office indicated in its 2023 report, small benefits reductions or revenue increases (through quicker payroll growth, wage growth, or tax rates) could dramatically prolong the program’s full funding. The report outlined several theoretical adjustments as possible ways to keep Social Security strong and the estimated change in Social Security’s actuarial balance associated with the various policy options.
In the Social Security Board of Trustees’ 2023 annual report “Conclusion,” they once again recommended Congress work on legislation to fix the funding issue. But, until Social Security’s issues are perceived to be more pressing, don’t expect Congress to vote on any fixes. Ultimately, however, these government programs aren’t some social contract, they’re legislated entitlements. They’ve been amended and likely will be again, all through a simple vote.
In my view, the reality is fretting over the funding status of Social Security now is an exercise in futility. It’s too long-range, hinges on too many changeable and shifting inputs, and is unlikely to materially impact the economy or stocks at any point in the foreseeable future. I first said this in 2012 when writing about Social Security, and we are still debating the exact same fear.
