Q&A of the Day – Social Security’s Looming Insolvency
Each day I feature a listener question sent by one of these methods.
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Today’s Entry: Brian- I have a question that perhaps you could address with your daily Q&A. If Social Security becomes insolvent, I know that payments will be cut. My question is two-fold. After cuts would payments continue to decline overtime and how big is the shortfall? Social Security is such a politically sensitive subject I don’t think politicians will do anything about it until they’re forced to, but as I’ve heard, the problems will only be worse by not addressing the issues sooner.
Bottom Line: Social Security’s looming solvency issues have been a well known creeping crud for decades. Under the current structure for Social Security, which was established with a new law in 1983 (the last time legislative action was taken to address Social Security solvency concerns), we’ve known Social Security’s current trajectory isn’t sustainable for decades. Starting in 1993, the Social Security Trustees’ reports have projected eventual annual shortfalls. Notably, solvency projections have remained extremely consistent over the years.
In 1993, the Social Security Administration projected insolvency for the program’s general fund starting in 2036. As of last year’s report, the currently projected insolvency date for the general fund hits in 2035. It’s rather remarkable that 32 years later, the projected insolvency date has only changed by one year. So, in other words, all that’s meaningfully changed with Social Security since it was first known that there was a looming Social Security crisis is our proximity to it. When solvency issues were projected 43 years into the future, it was easy for politicians to ignore the political football that reforming Social Security would be. Now that we’re only eight years away from projected shortfalls in certain Social Security programs, and only ten years away from projected general fund insolvency, there’s a greater sense of urgency to address the program’s needs.
In addressing today’s question, the first projected program to reach insolvency is the Social Security Old-Age and Survivors Insurance fund. Upon insolvency in 2033 – it's currently projected that payouts would be cut to recipients by 21%. In 2035, all Social Security programs will have reached insolvency by current estimates, with benefit cuts averaging 17%. Most recently, with this year’s COLA adjustment, the average Social Security recipient receives $1,829 per month. In today’s dollars, that would represent an average cut of $311 per month in benefits. As for whether the problem would continue to worsen over time or stabilize after the initial cut?
Projections suggest that without changes cuts could grow from 17% to as high as 48% overtime. So yes, Social Security’s projected insolvency is only expected to considerably worsen overtime if left unaddressed. As for the projected shortfall?
The Committee for a Responsible Federal Budget estimates that in order to avoid insolvency, without changes in the current program, an additional $3 trillion in revenue, or $300 billion annually, beyond current projections, would need to be brought into the program. This is illustrative of how waiting to address the issue is problematic. Federal spending is estimated to hit $6.8 trillion during the current fiscal year. $300 billion is significant, but it’s also “only” 4.4% of the total federal budget. However, imagine trying to account for a shortfall of $3 trillion, or 44% of the country’s entire annual spend, all at once. It’s not viable, especially for a country already $36.5 trillion in debt (let alone what it might be in ten years). For that reason, it’s likely changes will come to the program, like what we saw in the early 80’s, prior to insolvency taking place.
For his part, President Trump has said he will strengthen the program with an indication that the strengthening would largely come from reducing waste, fraud and abuse within it. Officially, the Social Security Administration estimates fraud to be $13.6 billion annually. Elon Musk indicated over the weekend that abuse between Medicare and Social Security may total $100 billion. Even if say, $50 billion in fraud was eliminated annually, that’d still only account for a sixth of the estimated annual shortfall. Clearly that’s helpful but not a panacea. Another way the program can be strengthened without meaningful changes is through economic growth. If, for example, the labor participation rate rises, and wage growth meaningfully expands above the average trendline – leading to more people paying into Social Security and at higher levels – that could go a long way towards bridging the gap.