Social Security is approaching crisis territory

Social Security is approaching crisis territory
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For three decades, we’ve known Social Security was on a path toward insolvency. Back then it was a concern. Later, it was a challenge. Now, it's close to becoming a crisis.

Describing Social Security as a crisis may seem provocative or alarmist, but how else would you describe a retirement program that, under current law, will not be able to pay full benefits to many current retirees?

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The recent Trustees’ report projected that Social Security will draw down its reserves by 2035, at which point the law requires a 20-percent across-the-board benefit cut if nothing is done to shore up the trust fund. 

2035 seems like the distant future, but it's not. It’s the year that today’s 51-year-olds will reach the normal retirement age and that today’s youngest retirees turn 78; for context, the average retiree today will live to about age 85. 

Think about it: Under current law, we cannot promise full benefits to even the average new retiree, to say nothing about current or future workers. Social Security isn’t something that needs to be saved for your kids or your grandkids; it needs to be saved for your parents and grandparents! 

A sound retirement program would be reasonably expected to pay all benefits to workers contributing into it. A stable one would at least be able to pay benefits to those currently collecting. Without legislative changes, Social Security will not be able to do either.

At its core, the problem is demographic, but it’s also financial.

Demographically, we’re an aging population. Since 1965, the number of seniors and other beneficiaries has tripled, while the number of workers has only doubled.

The number of beneficiaries is slated to grow by another 2 percent per year over the next decade, while the number of workers will grow by only 0.5 percent per year over that period.

Due to this trend, the program must pay benefits to a rapidly growing number of people, but it lacks a growing tax base of workers to finance these benefits. As a result, we’ve spent more on benefits than we’ve raised in taxes every year since 2010.

Financially, based on the trust fund perspective, the program has been able to manage these deficits by relying on interest from its reserves, which were built up as a result of surpluses in the 1990s and 2000s.  

But the trust funds have a half-life. Starting next year, the program will need to start drawing from its principal in order to help cover the $1.8 trillion of program deficits over the next decade. 

By 2035, the trust funds will be completely empty, and the gap between costs and revenues will total about $500 billion — more than a 1.1 percent of GDP.

If we wait to take action until then, neither “scrapping the cap” by subjecting all income to the payroll tax nor eliminating benefits for new enrollees would be enough to secure the trust fund even temporarily and prevent an across-the-board benefit cut that would reduce lifetime benefits by $100,000 for a typical new retiree. 

Policymakers would need to do something far more drastic, like raising payroll taxes for everyone — including the middle class and working poor — by almost one-third or cutting benefits for those already in retirement and all new retirees by an average of nearly one-quarter. 

Or, policymakers might simply abandon the self-funded nature of the program by borrowing from general revenue — adding more to the national debt than we would otherwise and ending Social Security’s century-old status as a protected program, largely walled off from the rest of the budget.

None of those options would be appealing, and the fact that they might have to apply to people in retirement today is beyond unacceptable.

Fortunately, it is not too late to change course. We can still deliver a stronger, more progressive, more pro-growth and financially sound Social Security program that strengthens retirement security for those who need it most.

In so doing, we should look to those who have done that hard work to develop and propose a responsible solvency plan:

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All three plans show that we are now well past the point that adjustments can be phased in gradually over the course of an adult lifetime, as was done in the Simpson-Bowles plan in 2010. And we’re past the point where we could save the program exclusively by taxing the wealthy or slowing benefit growth for new beneficiaries.

Over the next few years, our choices will narrow even further.

Lawmakers have long known Social Security faces future challenges. But the problem was always down the road, and the solutions always pushed to tomorrow. 

Now tomorrow is here, and we only have a few years to make the sensible revenue and benefit changes necessary to secure the program. It’s time to start treating this problem like a crisis and acting to address it before it becomes a catastrophe. 

Marc Goldwein is the senior vice president and Senior Policy Director for the Committee for a Responsible Federal Budget. Follow him on Twitter: @MarcGoldwein.