Commentary: Social Security crisis worse than thought; can't be wished away
This article first appeared in the St. Louis Beacon, Jan. 9, 2013 - How could our political leaders celebrate legislation that will have little impact on the looming fiscal crisis? What the American Taxpayer Relief Act of 2012 actually accomplished was to feed the maws of the populist groundswell for raising taxes on the wealthy, and surreptitiously raising taxes on almost every worker in the economy.
The eleventh-hour passage of the bill helped camouflage the 50 percent increase in the Social Security tax paid on income up to $113,700. That tax increase will hit the middle class hard. Estimates are that the average family will pay roughly $2,000 more in taxes in 2013 than in 2012. With an economy still trying to find its legs, for most of us that additional tax will not be covered by higher incomes. Based on projected wage increases, many families will be lucky to eke out any net gain in disposable income in 2013 after this tax bite.
What is distressing is that legislation ignored the major factors creating the fiscal crisis. Policy makers of all stripes promise a renewed, serious debate about entitlements (Medicare, Medicaid and Social Security) in the coming months. But if history is prologue, much smoke and little fire are to be expected.
That is too bad, because things are getting worse: In 2010 Social Security ran its first deficit in 25 years, paying out nearly $50 billion more in benefits than its revenues. At this pace, the government projects that the fund will be exhausted by 2033.
Recent research suggests that the problems with Social Security may be worse than the government’s dire estimates suggest. Though arcane, the potential funding disaster lies in the underlying calculations used to project required revenues and payouts.
Gary King, director of Harvard’s Institute for Quantitative Social Science, and Samir Soneji, a professor in Dartmouth’s Institute for Health Policy and Clinical Practice, have explored the technical aspects of the Social Security Administration’s projections. Their analysis, recently summarized in The New York Times and made available at their website j.mp/SSecurity, found that official projections under-predict the life-expectancy of Americans. This, in turn, leads to a serious understatement of how much the fund will need to remain solvent in the future.
Using alternative forecasts of demographic trends, King and Soneji estimate that the Social Security Trust Fund will be insolvent in 2031, two years earlier than the government’s projection. They also estimate that the trust fund will, compared to current forecasts, need to payout an additional $800 billion by 2031.
The basic problem stems from changing demographics. One is the growing imbalance between the number of workers paying into the fund and the number of retirees receiving payments from it. With the bulge of baby boomers retiring and the reduction in birth rates, the ratio of workers to retiree is shrinking: In 1990 the ratio was about 3-to-1; in 2031 it could fall to 2.4-1. That may not seem like much of a change, but it is; especially when the increased longevity of the retiree cohort is factored in.
Social Security recipients are living much longer than current estimates employed by the Social Security Administration. Extended life expectancy means that Social Security payments will be made for a longer period than is currently built into official predictions.
The solution is straightforward: Unless revenues are increased (increased taxation of the working population), payouts to retirees reduced, retirement ages raised, or some combination, Social Security will fail to provide the retirement supplement many individuals have already built into their retirement calculus.
Congress probably will kick the Social Security can down the road, leaving the hard choices to future politicians. But this threat to our growing fiscal imbalances will not self-correct over time. If Social Security is to remain viable for future generations, tough choices must be made, and soon.
R.W. Hafer is a distinguished research professor of economics and finance at Southern Illinois University-Edwardsville and a research fellow at the Show-Me Institute.