Image Courtesy of The Hill
By: Jeremy Perillo
As if COVID-19 has not ruined enough, the Treasury has recently reported that the Social Security trust funds will run out of money in twelve years, sooner than originally anticipated because of the pandemic. The Social Security trust funds help support the social insurance programs consisting of retirement, disability, and survivor benefits.
Americans pay into Social Security with every paycheck they receive, bearing the assumption that when one reaches full retirement age, they will begin receiving checks from the Social Security Administration, as well as automatic eligibility for Medicaid. While this new projection is worrisome for the long-term health of one of the country’s largest social programs, it doesn’t mean that the program is going to close up shop in twelve years.
To be specific, the Old-Age & Survivor’s Insurance (OASI) fund is projected to run out of money in 2033. If the trust funds reach a point of insolvency as the report states, that does not mean that Social Security as we know it will cease to exist. Only the trust-fund financial cushion portion of the program is expected to be exhausted. Social Security will still be collecting payroll and other taxes, keeping some aspect of the program alive. Regardless, insolvency will require changes that typically do not excite Americans: limiting/cutting benefits and tax increases.
Any easy way to understand what Social Security is experiencing is looking at it through the analogy of a checking and savings account. The checking account contains the payroll and other taxes accumulated, and it is paying the brunt of benefits/expenses to the program. The trust fund can be represented by a savings account, standing by to support the program if necessary. When funds in the checking account are not able to meet the full cost of the benefits, the savings account is tapped to make the difference.
As Americans continue to retire at astounding rates— thanks to the baby-boomer generation— the Social Security funds are having to dip into the “savings account” more often, leading to the pending doom of insolvency. The worker-to-beneficiary ratio has fallen from 5.1 in 1960 to 3.3 in 2005, with more up-to-date numbers suggesting that today only 2.7 workers support each beneficiary.
On a more positive note, even with the insolvency of the trust funds, the report to Congress identified that there would be sufficient income to pay 78 percent of scheduled benefits.
In terms of solutions, Congress can help the program by raising payroll Social Security taxes and/or benefit cuts. Again, neither of those are popular, let alone a combination of the two, but letting the program crumble completely would amount to political suicide. The Biden administration ran on a vague platform of Social Security reform, without specifically mentioning raising the retirement age. A successful campaign led by the Biden administration to reform Social Security benefits would not only help the American public but also yield a political victory to his administration.