The Collapse of the Social Security Ponzi Scheme

While Capitol Hill’s denizens frequently discuss how their budgetary changes are going to impact the taxes paid by Main Street and Corporate America, they rarely mention the impact of these changes on the entitlements that most Americans feel are their birthright.  This is particularly the case for the nation’s Social Security system, a key part of retirement funding for tens of millions of Americans.  Thanks to the Committee for a Responsible Federal Budget (CRFB), we have a glimpse into what lies ahead for this key aspect of life in the United States.

Let’s open this posting with a graphic from another one of the CFRB’s studies showing how the population in the United States is projected:

As you can see, the number of Americans 65 years of age and older is projected to more than double from around 50 million currently to over 100 million in 2070.  Obviously, this is going to put a strain on age-based entitlement programs.

According to CRFB’s analysis of the 2017 Social Security Trustees Report, we find the following:

1.) On a combined basis, the Old-Age, Survivors and Disability Trust Funds (OASDI) face a theoretical 75 year shortfall of 2.83 percent of taxable payroll or 1.01 percent of Gross Domestic Product and will be insolvent by 2034.

2.) Social Security will pay out $27 billion more in benefits than it receives in tax revenue this year.

3.) Social Security will generate cash flow deficits of $1.4 trillion over the next 10 years and $4.9 trillion over the following decade as shown here (as a percentage of payroll):

Social Security deficits will reach 1.36 percent of GDP by 2037 and 1.54 percent of GDP by 2091.  

4.) On a present value basis, the program’s 75 year  unfunded obligation will reach a total of $12.5 trillion.

5.) The Social Security Disability Insurance (SSDI) trust fund will deplete its reserves in 2029, the Old Age and Survivors Insurance Trust Fund (OASI) will be depleted in 2035 and, on a combined basis, the OASDI trust fund will run out of reserves by 2034 as shown on this graphic:

Here is an interesting table showing how the OASI funding has changed over the period from 1937 to 2016, noting in particular the dropping “net increase”:

In the current legal environment, if a trust fund becomes depleted, there is a conflict between two federal laws.  Under the Social Security Act, beneficiaries are still entitled to receive their full scheduled benefits.  Under the Antideficiency Act, governments are prohibited from spending an excess of available funds.  This means that the Social Security Administration would not have legal authority to pay full Social Security benefits.  After insolvency, Social Security would continue to receive tax income which would allow it to pay out a majority of scheduled benefits.  According to a study by William Morton and Wayne Liou at the Congressional Research Service, Congress could restore Social Security’s fiscal balance by one of two means with actions taking place in 2034:

1.) Reducing scheduled benefits by 23 percent in 2034 with the reduction in benefits growing to 27 percent by 2091 as shown here:

A benefit cut of 23 percent in 2034 will look like this:

a.)  Newly retired 62 year olds (in 2017) would see a cut in benefits of $3700 per year in 2034.

b.) A beneficiary that reached full retirement age (67) in 2033 will see a cut in benefits of $5800 per year (in today’s dollars) in 2034.

2.) Raising the Social Security payroll tax from 12.4 percent to 16 percent following insolvency in 2034 and then gradually increase it to 16.9 percent by 2091 as shown here:

With a significant proportion of state and private pension plans underfunded and the funding issues facing the Social Security scheme, it is looking increasingly like the pension Ponzi scheme has finally   reached the point where it will collapse under the weight of the aging American population.  If Congress hopes to achieve any sort of fiscal balance in the Social Security scheme, they will have to act quickly to phase in either cuts in benefits, increases in payroll taxes or some combination of the two.  The longer that Congress waits to take what will surely be unpopular action on the looming Social Security time bomb, the worse the situation will become.  Instead of focussing on this issue that is of great importance to the vast majority of Americans, Congress seems to be focussing its energies on the current Donald Trump reality television show that has taken over Washington since the 2016 election.

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