Why all the pessimism over Social Security?

In what has become an annual ritual, the Social Security trustees issued a stern warning this week to Congress in their latest report on the state of the federal retirement program and of Medicare. Their conclusion:

"Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare. Lawmakers should address these financial challenges as soon as possible. Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare."

Those findings had a familiar ring, echoing the same concerns the trustees have expressed for years about the funding level of Social Security and Medicare. What they gloss over is the viable long-term solutions for these issues. 

Over the course of Social Security's 82-year history, the Social Security Administration has collected roughly $19.9 trillion in payroll taxes and other income, and paid out $17.1 trillion in benefits and other costs. This leaves asset reserves of more than $2.8 trillion at the end of 2016 in the two funds (Old Age and Survivors Insurance, and Disability Insurance).

The annual report typically focuses on the combined trust funds, referred to as the OASDI funds. The trustees forecast that the combined trust funds will be depleted in 2034, the same year as projected in the 2016's report. The projected 75-year actuarial deficit for the OASDI Trust Funds is 2.83 percent of taxable payroll, up from 2.66 percent projected in last year's report. This deficit amounts to 1 percent of the U.S. GDP over the 75-year time period covered by the report.

Under current law, if the trust funds are depleted, then benefits will be reduced to the level that can be funded through payroll taxes collected from all workers employed at the time. The 2017 report projects that about three-fourths of benefits could be paid after 2034 if the fund is exhausted and Congress doesn't act to shore up the funding. 

This is an important item to understand. If the trust fund is depleted, retirees would not have their benefits completely eliminated, as many people believe. Of course, a 25 percent haircut would be very bad news. However, Social Security's funding challenges cause many people to be too pessimistic, and believe they won't get anything from Social Security. 

What it will take to fix the system

A package of tax increases and benefit reductions that have a combined value of 1 percent of the GDP can put OASDI into long-term balance. There have been a variety of proposals floated by our legislators to put the system in balance, including:

• Reducing benefits by capping cost-of-living increases, increasing the retirement age, and other cutbacks
• Increasing revenue by raising the wage cap (currently $127,200), increasing the tax rate, and other revenue enhancements

Several reputable organizations have also recently analyzed possible fixes to Social Security, including the Congressional Budget Office, the American Academy of Actuaries, and the BiPartisan Policy Center. In summary, it's a fixable problem if our leaders can find the willpower to agree on a solution.