Updated 4:05pm ET The trustees of the Social Security system said Monday the fund that helps sustain retiree and survivors’ benefits will become exhausted in 2033, three years sooner than they projected last year.
At that point, payroll taxes and taxation of Social Security benefits will provide only enough income to pay about 75 percent of the benefits that Congress has promised to retirees and survivors.
In practical terms, this means that a 40-year-old worker who is eligible to collect retirement benefits in 2039, would see his or her expected retirement benefit cut by about 25 percent, unless Congress took action to change the program’s funding or its benefit structure.
The trustees attributed a big part of the change in their forecast to “slower growth in average earnings, lower interest rates, and higher unemployment rates due to a longer period of recovery from the recent recession,” as well as to a 3.6 percent cost-of-living increase in Social Security benefits last December.
Last year, Social Security paid benefits of $725 billion. There were about 55 million beneficiaries.
In their annual report, the trustees also estimated that Social Security’s Disability Insurance fund will be exhausted in 2016, two years sooner than last year’s estimate. Congress will need to take action to avert that outcome, with the most likely remedy being a reallocation of the payroll tax between the part of the tax that supports Social Security’s retirement and survivors’ benefits and the part of the tax that pays for disability benefits.
The Social Security system does have assets in the form of $2.7 trillion in Treasury bonds -- but those assets must be redeemed – cashed in – in order to pay benefits.
“The redemption of those bonds can only occur out of current income,” explained Senate Budget Committee chairman Kent Conrad last year. “The general fund has been borrowing from Social Security and we've borrowed well over $2 trillion,” he said. “That money has got to be paid back. How's it going to be paid back? It's going to be paid back by the other general expenditures of the federal government having to be reduced to make way for the payments that we're going to have to make on those bonds.”
The trustees said that to keep the Social Security trust funds solvent over the next 75 years, Congress could take a number of steps:
- increase the payroll tax rate from its current level of 12.4 percent to 15.01 percent;
- reduce benefits by 16.2 percent;
- find alternative sources of revenue;
- adopt some combination of these approaches.
Separately, the trustees, who are also the trustees of the Medicare program, reported that the Medicare fund that pays hospital costs for older and disabled Americans will be exhausted by 2024, the same forecast as they made last year.
After the assets of the Medicare fund are gone, if Congress were to take no action, projected Medicare revenue would be adequate to cover 87 percent of the estimated spending in 2024 and about two-thirds of projected costs in 2050.
The trustees’ report underscored the need for Congress to either change the funding of Medicare or curb the increasing cost of the benefits being paid out, or address both funding and benefits.
Reaction to the trustees’ reports varied widely along the ideological spectrum.
Jason Fichtner, a senior research fellow at the free-market oriented Mercatus Center at George Mason University, said the report showed that Social Security will be facing an increasing mismatch between taxes being paid in and benefits being paid out.
“The longer we wait, the higher the tax rate is going to have to be to make up the difference… This is a big shortfall and it's just going to get larger with each passing year if we don’t do something to reform Social Security,” he said.
House Democratic leader Nancy Pelosi said, “Despite the repeated efforts of Republicans to privatize Social Security and end the Medicare guarantee, these vital initiatives remain strong. Today’s Trustees’ report affirms that Social Security and Medicare will continue to provide critical benefits to seniors and other Americans.”
AFL-CIO President Richard L. Trumka said in a statement that the report “confirms that Social Security remains a vibrant, strong, and durable program….The Social Security surplus is large and growing. Despite lower than expected wage and economic growth and unexpected increases in the cost of living, Social Security will be able to pay full scheduled benefits at least until 2033 absent congressional action.”
He pledged that the labor union confederation “will oppose any Social Security benefit cuts, such as a reduction of COLAs (cost of living adjustments) or an increase in the retirement age, no matter who proposes them.”
But Maya MacGuineas, president of the Committee for a Responsible Budget, saw the trustees report as “a good reminder of what we've known for decades now -- that the Social Security program is on a troubling path and must be reformed. Time is not on our side, and the longer we wait the harder it is going to be to fix this program."