The looming, long-term deficit of the Social Security system is the perpetual elephant in the room in Washington. Each year, we are reminded of the silent giant's presence with the release of the Social Security Board of Trustees' annual report.
The trustees released the 2014 report on Monday, about three months later than its usual April reporting date. It showed the combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance trust funds are projected to become depleted in 2033 — unchanged from last year's report.
That means without future congressional action to cut benefits, increase taxes or both, the Social Security Administration would be able to pay just 77% of promised retirement and survivor benefits from payroll taxes beginning in 2033.
But like the Indian folk tale of the six blind men who perceived the elephant differently depending on whether they grabbed its thin snake-like tail, its flexible tree branch-like trunk or its solid pillar of a leg, the implications of the latest trustees' report depends on whom you talk to.
“Social Security remains well-funded and as the economy continues to improve, Social Security's total income is projected to exceed its expenses,” the National Committee to Preserve Social Security & Medicare said in a statement responding to the trustees' report.
The advocacy group referred to the portion of the trustees' report that showed the Social Security trust fund grew by $32 billion from last year to nearly $2.76 trillion. Reserves are projected to continue to grow through 2019 due to continued payroll contributions and interest on the trust fund's assets.
The advocacy group also noted that the trustees project a 1.5% increase in Social Security benefits next year, but no projected increase in Medicare Part B premiums.
But by 2020, taxes and interest will fall short of annual benefit payments so the government will be required to draw down trust fund assets to meet benefit commitments before the trust fund is expected to be exhausted in 2033.
Meanwhile, the Medicare trustees project the Hospital Insurance Trust Fund will be able to cover its obligation until 2030, four years later than projected in 2013.
“Retirement uncertainty continues to soar,” said Cathy Weatherford, chief executive of the Insured Retirement Institute. “With Social Security and Medicare forming the base of almost every American's retirement plan, this year's reports — despite the modest improvements in Medicare's finances —will not be a boost to lagging retirement confidence measures.”
The trustees report also highlighted a more immediate problem: the Social Security disability trust fund. When considered on its own, the disability trust fund is projected to exhaust its reserves in 2016, just two years from now. At that point, there would be enough dedicated revenues to pay just 81% of promised disability benefits.
Since Social Security is precluded from spending money it does not have, it would have to cut disability benefits by about 19%. But Congress is unlikely to let that happen, said Alicia Munnell, director of the Center for Retirement Research at Boston College. She noted that in 1994, the last time the disability program was about to run out of money, Congress reallocated 0.6% of the payroll tax from the Old-Age and Survivors Insurance program to the Disability Insurance program.
“Congress is likely to reallocate payroll tax revenues this time as well,” she said in her new report, “Social Security's Financial Outlook: The 2014 Update in Perspective.”
“Of course, reallocation is not manna from heaven,” she added. “The OASI program will look much worse and the outlook for Social Security as a whole will remain unchanged.”
The Committee for a Responsible Federal Budget argued that the impending exhaustion of the disability trust fund is an opportunity for overall Social Security reform that should not be wasted.
“Although some reallocation or interfund borrowing may ultimately be necessary to respond to imminent depletion of the DI trust fund, relying solely on transferring or reallocated funds to address the shortfall would represent a missed opportunity to fix the financial and structural issues facing the DI program,” the committee wrote.
“Policymakers should not waste the opportunity they have now to make thoughtful changes well in advance of the insolvency date,” the committee members wrote. “The luxury of time is still on our side — but just barely.”
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