What’s new with Social Security? An update

In June, the trustees of Social Security's trust funds released their annual report.

What many already know remains the same. The outlook for the future of the Social Security program as we know it presents a challenge on the horizon. While the outlook has raised questions for some time now, an important threshold was breached this year. The report said Social Security's cost will "exceed its income for the first time since 1982 and remain higher throughout the projection period." What this means is that asset reserves (trust fund) will have to be utilized this year.

What's important to note is that benefits paid out have exceeded taxes coming in since roughly 2010. However, interest on monies in the trust fund covered the shortfall. This year, despite rising interest rates, that will no longer be the case. As noted in the report, this trend will continue through their projection period as a result of not only significant amounts of baby boomers retiring, but lower birthrates in the working-age population.

Moody's economic research noted that from 1974 to 2008, there were 3.2 to 3.4 workers per Social Security beneficiary. In 2017, there were 2.8 covered workers per beneficiary, and that number is projected to continue to decline to 2.2 by 2033.

In line with projections in previous reports, the two trust funds are projected to be depleted in the year 2034. At that point, income received would only be enough to pay 79 percent of benefits. This would certainly be a problem for the 63 million current beneficiaries of benefits and the 175 million covered workers. The good news is, 2034 is still a ways away and policy makers do have tools at their disposal. As commented by Moody's, administrative costs currently represent less than 1 percent of Social Security spending.

As such, the two options to shore up solvency for the program are to either increase taxes or pay fewer benefits to future retirees. For instance, increasing the payroll tax from 12.4 percent to 15.4 percent would sustain Social Security across the trustee's report 75-year projection period. Removing the cap on earnings taxed (currently $118,500) would also provide solvency for an additional 73 years. (Moody's)

Asking people to pay higher taxes is never politically expedient and has stood in the way of major reform since the 1983 changes. Interestingly enough, Moody's economics analyzed all major pieces of reform legislation over the last decade and found the median proposal would have increased solvency for an additional 43 years. Unfortunately, what has been politically expedient has not coincided with shoring up solvency for the program, and we have another annual report with bad news. Most all proposals previously brought have been bipartisan in nature but have all failed to move forward and provide meaningful reform.

Hopefully this year's report will add an additional sense of urgency to policy makers as we have crossed yet another threshold on the path to eventual benefit cuts. Every American will be impacted by any decisions or changes made to Social Security in one way or another. It is with that, we recommend you write your senator and let your voice be heard. Until we see large-scale changes, the annual report will likely be more of the same.