Can We Prevent a National Retirement Disaster?

William Thomas Cain/Getty Images

William Thomas Cain/Getty Images

In July 2014, the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds delivered its 2014 annual report to Congress. The report was intended to inform Congress about the current state of the Old-Age, Survivors, and Disability Insurance (“OASDI”) and the Disability Insurance (“DI”) programs, and projects forward to the best of its abilities the health of the programs in the future. These programs fall under the umbrella of Social Security.

The 2014 report continued in the same tone as the updates from 2013 and 2012 and vindicated the position of many policymakers and a majority of the American population. Chiefly: there is a problem facing Social Security. To be dramatic about it, although the language of the report is modest, a crisis is brewing.

At the end of 2013, the OASDI program was providing benefit payments to approximately 58 million people. This group consisted of 41 million retired workers, 6 million survivors of retired workers, 11 million disabled workers, and all of their dependents. Total expenditures for the year were $823 billion, a 4.7% increase from reported expenditures of $786 billion in 2013.

On the other side of the equation, total income — i.e. taxes collected that are appropriated for the OASDI program — was $855 billion, an increase of 1.8% from the $840 billion collected in 2013. That consisted of $752 billion in non-interest income, and $103 billion in interest earnings. In 2012, the program deficit was $169 billion, largely due to a temporary reduction in the Social Security payroll tax in 2011 and 2012 (the program ran a pre-interest deficit in 2011 as well). In 2014, with some more revenue coming in, the program was expected to run a pre-interest deficit of $80 billion, following a deficit of $79 billion in 2013.

Justin Sullivan/Getty Images

Justin Sullivan/Getty Images

The future from here is not too hard to predict. The baby boomers are aging and life expectancy is increasing — there will be more people retired for longer in the future, and Social Security expenditures will increase at a faster rate than the program can be funded. In the short term, costs to fund the programs will continue to increase as more retirees begin collecting Social Security checks. Total costs will be 4.9% of GDP for 2014, increase to about 6.2% by 2035, decline to 6% by 2050, and then remain between 6% and 6.1% through 2088, according to the report’s estimates.

“Beginning in 2020,” reads the report, “annual cost exceeds total income, and therefore reserves begin to decline… The dollar level of the combined trust fund reserves declines beginning in 2020 until reserves are depleted in 2033.” With the reserves exhausted, the board of trustees predicts that the administration will only be able to pay about 77% of benefit costs beginning in 2033, and 72% of benefit costs in 2088.

Source: Board of Trustees 2014 report

Source: Board of Trustees 2014 report

The report explained why: “The projected OASDI annual cost rate increases from 13.95 percent of taxable payroll for 2014 to 17.09 percent for 2035 and to 18.19 percent for 2088.” In short, unless taxes are increased or spending is cut, the OASDI program will not be able to satisfy its obligations as costs grow exceed income. (Emphasis added.)

“For the combined OASI and DI Trust Funds to remain solvent throughout the 75-year projection period: (1) revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.83 percentage points (from its current level of 12.40 percent to 15.23 percent; a relative increase of 22.8 percent); (2) scheduled benefits during the period would have to be reduced by an amount equivalent to an immediate and permanent reduction of 17.4 percent applied to all current and future beneficiaries, or 20.8 percent if the reductions were applied only to those who become initially eligible for benefits in 2013 or later; or (3) some combination of these approaches would have to be adopted.”


Paul J. Richards/AFP/Getty Images

The problem with both of those solutions, or even some combination of the two, is that they negatively impact one or both of the parties involved. Either those paying into the program must pay more, or those receiving must receive less (or both). Even at a glance it’s easy to see that increasing taxes or reducing payments will meet a tremendous amount of resistance.

Alternative proposals do exist, but to be clear there doesn’t appear to be a totally pain-free solution. Editing Social Security means editing society. Either young people assume a greater responsibility for the elderly and disabled, step up to the financial sacrifice, and pay more into the system — or the retired and disabled make do with less, which would be devastating given the current poverty rate among the elderly.

Or, as Donald Fuerst, the Senior Pension Fellow at the American Academy of Actuaries, proposed to Congress in 2013: increase the age of retirement. From his testimony:

“Social Security’s Old-Age and Survivors Insurance (OASI) challenges stem from our population demographics: Partly from lower birth rates and immigration levels, and in part from Americans living longer. Simply put, the longer someone lives, the more benefits Social Security must pay. In 1940, when the new Social Security Administration began paying monthly retired-worker benefits, the ‘full retirement age’ was 65. At that time, workers who survived to age 65 had a remaining life expectancy of 12.7 years for males and 14.7 years for females. In 2011, life expectancy at age 65 was 18.7 years for males and 20.7 years for females, an increase of six full years for males and females.”

Adjustments to the full retirement age have been made in the past but have failed to keep up with increases in average life expectancy. For example, between 1954 and 1960, the full retirement age was incrementally increased from 66 to 67. However, as Fuerst points out, “the 1983 schedule of increases in the full retirement age account for only two of the additional six years of life expectancy that we’re experiencing today.”

To make a long story short, Fuerst proposes increasing the full retirement age in increments up to as high as 70. “This would reduce the long-range actuarial deficit by about one-third. Further reductions of the long-range deficit would require a rate of increase more rapid than one month every two years.” (Fuerst’s full testimony is worth a read.)

Not surprisingly, the academy of which Fuerst is a member continues to push for a higher retirement age. The organization distributed a white paper last year that lays out the pending depletion of Social Security funds and why it believe raising the retirement age could be beneficial, including boosting Social Security and increasing the economic output. However, the report does also acknowledge that workers in physically demanding jobs have shorter-than-average lifespans and could face disproportionate benefit cuts if they were required to work longer or take benefits early with a higher penalty rate.

Though not all people might agree with the academy and Fuerst, most will realize that something should be decided sooner rather than later. Aside from everything else surrounding the issue, one of the biggest reasons is that the projections the board of trustees makes about raising taxes to remedy the solvency issue keep rising. In the 2013 report, proposed tax increases to fund the programs were almost a full percentage point lower across the board. “Addressing the program’s solvency now would allow Congress to have a fuller range of options to consider, many of which could be more modest in their adjustments, such as slow phase-ins over many years,” Fuerst said in his testimony. “Deferring efforts to address the solvency of the program to the next decade or beyond will more profoundly affect beneficiaries and the taxpaying public.”

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