Without changes, those who rely on Social Security income will have to tighten their belts in about 13 years.
The reserve depletion date for the combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds was lowered from 2035 to 2034 as a result of employment, earnings, interest rates and GDP dropping substantially in the second calendar quarter of 2020, according to a report by the Social Security Administration.
“The pandemic and its economic impact have had an effect on Social Security’s Trust Funds, and the future course of the pandemic is still uncertain. Yet, Social Security will continue to play a critical role in the lives of 65 million beneficiaries and 176 million workers and their families during 2021,” Kilolo Kijakazi, acting commissioner of Social Security, said in a press release.
The Center for Retirement Research at Boston College said one year is “not big news” but it does mean that we’re inching ever closer to reduced benefits for retirees without action.
“The point is that the window of opportunity to restore balance has narrowed dramatically over time. Whereas we used to have 65 years to figure out how to avoid trust fund depletion, with the 2021 Trustees Report’s projected depletion data of 2034, that number has dropped to 13 years. If nothing is done before depletion, benefits for all current and future retirees will have to be cut by 21%,” researchers wrote in an analysis of the Trustee report.
The Social Security Administration found the asset reserves of both the OASI and DI Trust Funds in 2020 increased by $11 billion, to a total of $2.9 trillion.
For the first time since 1982, the total annual cost of the program is expected to exceed total annual income in 2021 and remain higher through the next 75 years, the Social Security Administration said.
The total expenditures for both OASI and DI Trust Funds were more than $1 trillion in 2020, according to the press release.
“As a result, asset reserves are expected to decline during 2021. Social Security’s cost has exceeded its non-interest income since 2010,” according to the Social Security Administration press release.
The projected annual deficit over the 75 year time period is 3.54% of taxable payroll, which was higher than last year’s projection of 3.21%, according to the Social Security Administration press release. The Center for Retirement Research at Boston College said in its analysis that the biggest influencers for the deficit were fewer births and delayed childbearing, a 1% decline in potential GDP due to the COVID-related recession, updates to projections of benefits and moving the valuation date ahead one year.
“That figure means that if payroll taxes were raised immediately by 3.54 percentage points — roughly 1.8 percentage points each for the employee and the employer — the government would be able to pay the current package of benefits for everyone who reaches retirement age through 2095, with a one-year reserve at the end,” the Center for Retirement Research at Boston College wrote in its report.
One hundred and seventy five million people were covered by Social Security and paid payroll taxes, according to the Social Security Administration.
The projections in the report are best estimates of the effects of the coronavirus pandemic, the Social Security Administration noted.
The Center for Retirement Research at Boston College said in its analysis that “the increase in deaths due to COVID actually improves the system’s finances.”
“The bottom line is the 75-year deficit has increased, and it is not primarily due to COVID. At the same time, Social Security has once again demonstrated its worth during these tumultuous times, when — in the face of economic collapse — it continued to provide steady income to retirees and those with disabilities,” the Boston College researchers wrote in the report.
They pointed out that the increase in costs of the program rising rapidly to about 18% of taxable payrolls in 2040 is driven by the drop in total fertility rate after the baby boom.
“The combined effects of the retirement of baby boomers and a slow-growing labor force due to the decline in fertility reduce the ratio of workers to retirees from about 3:1 to 2:1 and raise costs commensurately,” the analysis said. The increase in the 75-year balance from the 2020 to the 2021 Trustees report is largely based on changes in the fertility rate projections — the single largest shortfall between 2035 and 2085, the researchers wrote in the report.
In an analysis of the report, the National Committee to Preserve Social Security and Medicare (NCPSSM) said the report shows that Social Security will “continue to play a critical role in the lives of the 65 million beneficiaries and the 176 million covered workers and their families who depend on the program now or will depend on it when they retire in the future.”
“The system remains stable and will be able to pay full benefits for many years to come — until 2034,” the group said in a statement. “Thereafter, there will still be enough income coming into the program to pay about 78% of all benefits owed.”
About 65 million people were receiving benefits at the end of 2020: 49 million retired workers and their dependents; 6 million survivors of deceased workers; and 10 million disabled workers and their dependents, according to the committee.
The committee said it was concerned, however, about the Trustees Report’s modest COLA projection of 3.6% for 2022.
“While higher than in most recent years, the National Committee believes that this estimate does not reflect the effect of inflation on today’s seniors and believes that Social Security’s COLA needs to be strengthened,” the committee said.
The cost of living increase is, by law, calculated based on the previous years’ increase, intended to offset additional living expenses due to inflation. But seniors spend a large portion of their income on health care expenses that are not covered by Medicare, the committee said.
“According to the Medicare Trustees, 40 percent of the average senior’s Social Security benefit will be consumed by Medicare out-of-pocket costs in 2095, compared with 23 percent in 2021,” the committee said.
The NCPSSM said it supports a bill that would base the COLA on the CPI-E, a consumer price index for the elderly that “better reflects the purchasing patterns of seniors.”
“Seniors cannot afford to have their COLA calculated using an index that does not accurately gauge the spending patterns that are unique to them,” the committee said. “This kind of specialized index should be used to make sure that seniors’ buying power does not erode over time.”
U.S. Rep. John Larson (D., CT) has written a bill that would combine the Trust Funds, bring more money into a new, single fund, and change how the cost of living adjustment (COLA) is calculated.
The bill would require the Bureau of Labor Statistics to publish a monthly Consumer Price Index for Elderly Consumers. Now, a Consumer Price Index for Urban Wage Earners and Clerical Workers is used to calculate the COLA, which many experts say does not keep up with
The legislation, if adopted, would slowly phase in an increase in the Social Security contribution rate so that by around 2043, workers and employers would pay 7.4% instead of 6.2%. An average worker, for example, would pay an additional 50 cents every week to keep the system solvent. Now, payroll taxes are not collected on wages over $132,900. The bill would apply the payroll tax to wages above $400,000, affecting the top 0.4% of wage earners.
“It puts a lot of new money into the system and would eliminate almost all of the long term deficit,” said Alicia Munnell, director of the Center for Retirement Research at Boston College and Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management.
The funds would come from payroll tax increases, she said.
“It would gradually increase the rate from 12.4% to 14.8% by the mid 2040s; it goes up very gradually at 0.1% a year,” Munnell said. “It would also apply the payroll tax on earnings above $400,000. So it increases the base and increases the rate.”
