Monday, June 24, 2019

This 36-Year Social Security Streak Is Nearly Over


Sean Williams, The Motley Fool June 23, 2019
There's little argument that Social Security is our nation's greatest social achievement. Of the more than 63 million benefit checks disbursed each month, more than 22 million people will be pulled out of poverty as a direct result of this payout.
That's what makes the news I'm about to tell you so disturbing: Big changes are headed Social Security's way, and you're almost certainly not going to like the outcome.
Social Security is facing a cash crisis
In early April, the Social Security Board of Trustees released its annual report on the short-term (10-year) and long-term (75-year) outlook for the program. As the trustees have found since 1985, the 2019 report alluded to an impending cash shortfall over the long term. More specifically, the trustees estimate a $13.9 trillion cash deficiency over the next 75 years, assuming the existing payout schedule, inclusive of cost-of-living adjustments, continues.
This estimated shortfall is the result of numerous demographic changes that have been going on for some time. Examples include the retirement of baby boomers, which is weighing on the worker-to-beneficiary ratio, as well as increased longevity, growing income inequality, declining birth rates, and even inaction from Congress.
According to the trustees, Social Security's prized 36-year streak of generating more revenue than expenditures is very much in doubt, beginning in 2020. After logging a $3.1 billion net surplus in 2018, the smallest surplus over the past 36 years, the trustees' report has called for an even smaller $1 billion net-cash surplus in 2019 (which would extend the streak to 37 years). But beginning in 2020 and beyond, Social Security projects to spend more than it brings in, leading to the steady depletion of its nearly $2.9 trillion in asset reserves. By 2035, all of the program's asset reserves are forecast to be exhausted, which may lead to an across-the-board reduction in payouts to retired workers of up to 23%.
The program's 36-year streak of net-cash surpluses may end a year earlier than expected
But here's the thing about the trustees' estimates: They're exactly that -- estimates. Last year's report had called for 2018 to be the first year of net-cash outflows in three and a half decades. Yet, as noted, the program actually generated a small net-cash surplus last year. This surplus was likely the result of stronger-than-expected economic growth spurred in the short term by the December 2017 passage of the Tax Cuts and Jobs Act, which reduced taxation on corporations and most individual taxpayers.
With the trustees calling for a surplus of $1 billion in 2019, it's looking, as of now, like this prediction may turn out wrong as well.
Each month, the Social Security Administration (SSA) posts the program's investment holdings. By law, the SSA is required to purchase special-issue government bonds with any net-cash surpluses, which allows the program to generate interest income, and gives the general public an up-to-date look at how much Social Security has in its asset reserves.
When the year began, Social Security had (long number alert) $2,895,174,945,000 in asset reserves. For you math-phobes out there, this is $2.895 trillion. But as of the end of May 2019, the SSA's investment holdings tallied $2,892,944,200,000, or $2.893 trillion (with rounding). In other words, over the first five months of 2019, the Social Security program saw an outflow of $2.23 billion. In the grand scheme of things, this is peanuts compared with the $2.893 trillion currently in asset reserves. But, more important, it could signal that the long-awaited, and feared, inflection point has arrived. 
Here's what's really irritating about the end of this streak
But what's really mind-boggling about Social Security's looming inflection point is that lawmakers on Capitol Hill have known of its coming for at least 34 years.
As noted, the trustees have released a long-term outlook for the program every year since its inception. Since 1985, they have cautioned that there was insufficient revenue to cover expenses. Although the asset reserve depletion date has changed often over these past 34 years, one thing that hasn't changed is the very clear warning to Congress that it does something, and quick, to stem the depletion of the program's asset reserves.
Furthermore, despite having resolutions that would undoubtedly strengthen Social Security, political hubris has kept Democrats and Republicans from finding common ground.
Democrats have a surefire plan to strengthen Social Security by increasing or removing the payroll tax cap on earned income. In 2019, all earned income between $0.01 and $132,900 is subject to the 12.4% payroll tax. But if Democrats in Congress had their way, exempted income above this $132,900 would also be subjected to the tax, thereby providing Social Security with an immediate injection of added revenue.
Republicans have a bona fide fix, too. The GOP proposes a gradual increase to the full retirement age, from a peak of 67 to as high as age 70. Raising the full retirement age would mean that future generations of workers would have to either wait longer to receive their full payout, or accept a steeper monthly reduction if claiming early. Either way, it would mean a reduction in long-term outlays for the Social Security program.
Both of these solutions work to shore up Social Security, and yet no middle ground can be found between both parties, because Democrats oppose any cuts to benefits, and Republicans won't vote in favor of tax hikes.
Thus, we're inching closer to Social Security's asset reserve doomsday, and lawmakers aren't doing a thing to stop it.

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