Social Security may be responsible for keeping more than 22 million people out of poverty each month, according to an analysis from the Center on Budget and Policy Priorities, but it's also a program that's on a collision course with disaster.
In June 2018, the Social Security Board of Trustees released its annual report, as it's done for decades, on the near-term (10-year) and long-term (75-year) outlook for the program. Similar to every report since 1985, the Trustees found that revenue generation would be insufficient to cover expenditures over the long term, suggesting that a benefits cut of up to 21% may be needed for then-current and future retirees by 2034.
Social Security's unwanted inflection point gets kicked further down the road
But the 2018 report contained a new harbinger of danger. Namely, it forecast that 2018 (rather than 2022, as was cited in previous reports) would be the first year since 1982 in which Social Security's expenditures outpaced its revenue collection. Although the Trustees forecast a relatively small net cash outflow of $1.7 billion, which is peanuts compared to the nearly $2.9 trillion currently held in asset reserves, it represents a plain-as-day signal that the existing payout schedule is unsustainable. Not to mention, these net cash outflows are expected to dramatically grow in size over the coming years as demographic changes weigh on the program.
Interestingly enough, this prediction didn't come to fruition. Investment holding data published monthly by the Social Security Administration -- the program's net cash is used to buy special-issue bonds -- shows that the aggregate investment holdings of the Old-Age and Survivors Trust (OASI) and Disability Insurance Trust (DI) (collectively known as the OASDI) rose just shy of $3.2 billion between the end of 2017 and the end of 2018. Although this was still the smallest net cash surplus since the Reagan administration passed the last sweeping overhaul of Social Security in 1983, it nonetheless pushed Social Security's unwanted inflection point out a bit further.
However, the release of new data on Social Security's investment holdings should have working Americans and retirees alike very worried.
This new data suggests a big change
According to Social Security Administration data from the end of February 2019, the aggregate amount of OASDI asset reserves invested was $2,892,241,837,000. Over the two months between the end of 2018 and the end of February, the amount invested by the DI Trust rose ever so slightly, while the amount invested by the OASI, which handles retired worker and survivor benefits, declined by $3.23 billion. Again, we're not talking about a jaw-dropping cash outflow, but it does appear that, at least through the first two months of 2019, the unwanted Social Security inflection point has arrived. Namely, Social Security may be a cash-burning rather than a cash-surplus program moving forward.
How's this possible? In addition to baby boomers retiring from the workforce in greater numbers, factors that include increased longevity, lower birth rates, growing income inequality, and lower interest rates that have led to less in the way of interest income collection have each played a role in weakening the Social Security program.
Now, to be clear, this inflection point, should this net cash outflow remain steady throughout 2019, does not signify that Social Security is insolvent. Even if all of this excess cash were to disappear as predicted by 2034, Social Security would still be every bit as solvent then as it is now. That's because recurring sources of income, such as its 12.4% payroll tax on earned income and the taxation of Social Security benefits over select income thresholds, ensure that money keeps flowing into the program for disbursement to eligible beneficiaries.
But, once again, this net cash outflow does signify the reality that the existing payout schedule isn't sustainable without raising additional revenue, cutting long-term expenditures, or finding a middle-ground solution that incorporates both fixes.
A political stalemate
Arguably, the biggest problem isn't coming up with a solution on how best to tackle Social Security's estimated $13.2 trillion cash shortfall between 2034 and 2092. Rather, it comes down to how best to get Democrats and Republicans, who each believe they have the best solution, to work together on a middle-ground fix.
Democrats have long favored an approach that leads to higher taxable revenue collection and more robust cost-of-living adjustments (COLAs). They aim to accomplish this by raising or eliminating the payroll tax earnings cap, which sits at $132,900 in 2019. While most working Americans pay into Social Security on every dollar they earn, salary and wages above $132,900 are exempt. Democrats want to end this loophole by requiring the rich to pay more into the system, while at the same time utilizing the Consumer Price Index for the Elderly (CPI-E) as the program's new inflationary tether. The CPI-E should lead to notably higher COLAs over the long run.
Meanwhile, Republicans have proposed a gradual increase to the full retirement age and a switch to the Chained CPI as the program's inflationary tether. Instead of raising additional revenue, the GOP's approach would aim to reduce lifetime benefits for future generations of workers and lower annual COLAs over time, thereby saving Social Security money by lowering expenditures.
Truth be told, each plan brings something to the table that the other lacks, and a bipartisan approach would be a considerably stronger long-term fix than a single-party solution. But even with Social Security's investment holdings data signifying that the program's unwanted inflection point may have arrived, getting our nation's lawmakers to play nice with each other and find a common-ground solution is easier said than done.