The negative impression about the finances of social security is so prevalent that most Americans are unable to separate bad news from the worse news for the program.
The latest projections from the Congressional Budget Office (CBO) fall into the worse news category. These estimates suggest that the social security crisis will be significantly detrimental, occur sooner, and cost more to fix than voters believe.
These results are a sharp contrast to the standard meme that, in the worst case, social security can pay everything to everyone for 17 years. These expectations are based on more favorable estimates of the Trustees of the Social Security Trust Funds.
The reality is we don’t know when benefits will be cut, or the size of the reduction. Thus, it wise to look at these figures in a range rather than with a calendar.
The combined estimates provided by the Trustees and the CBO suggest that social security can pay full benefits for 12 to 17 years. Once the trust funds are exhausted, experts believe that cuts will range between 20 and 30 percent. CBO believes the cost to fix social security is nearly double the projected remedy proposed by the Trustees. The phrase “4.68 percent of payroll” means that payroll taxes would rise to 20 percent just to kick the can.
Both agencies agree that social security is about to dive off a cliff with a degree of mathematical certainty. They only disagree in substance about the speed at which the calamity is moving. No one suggests at this point that the crisis is limited to those people who are under 40. People reaching retirement at a normal age today should expect to face benefit reductions for 3 to 8 years in retirement.
So, for those under 30, the crisis isn’t about what you will or will not collect in benefits, rather, it’s how you will manage your parents as their benefits are reduced. If CBO is correct, about half of the grandparents turning 75 this year will be alive when benefits are reduced.
Beyond these concerns, younger voters need to remember that the promises of reformers are based on the data from the SSA, which holds a much lower threshold for success. So ‘fixed’ may quickly return to broken. To illustrate the consequences, the trustees in 1984 believed that the changes to the system enacted in the 1983 reform would enable the system to meet its obligations for 75 years. A decade later, that forecast had dropped by 40 years. As a result, the people who traded benefit cuts in 1983 for the assurance that the program would be there for them now face benefit cuts in excess of 30 percent.
While the success of reform may vary, younger Americans face one certainty: rising costs. The 12.4 percent of wages paid by workers of my generation took care of not only existing retirees, but left a little something in the Social Security Trust Fund to pay our retirement.
Today, a worker contributes a larger share of wages on a larger portion of wages to the system where nothing left over. Beyond the payroll tax collections, employees will see a growing share of their general fund taxes used to repay the “something” that was left over from my contribution paid in the 1980s. (This is the crowding-out effect policy analysts warn about.)
We don’t have to wait 12 to 17 years to see who is more likely to be right. The next milestone in the process of crisis will be the redemption of bonds. That will give us some indication of who is right.