So­cial Se­cu­rity’s fu­ture is safe

Manteca Bulletin - - Perspective - CHRIS­TIAN WELLER Univer­sity of Mas­sachusetts Bos­ton

So­cial Se­cu­rity is the bedrock of Amer­i­cans’ re­tire­ment in­come se­cu­rity. So you may have been con­cerned by the news that the fed­eral govern­ment needed to dip into the So­cial Se­cu­rity’s trust fund to pay for the pro­gram this year. Does that mean So­cial Se­cu­rity’s fu­ture isn’t safe? As an econ­o­mist who has writ­ten ex­ten­sively on re­tire­ment and So­cial Se­cu­rity, I be­lieve the sys­tem’s prob­lems are man­age­able. The only ques­tion is whether Congress has the po­lit­i­cal will to re­solve them. A man­age­able prob­lem So­cial Se­cu­rity ben­e­fits typ­i­cally make up the largest share of re­tirees’ in­comes, even though the av­er­age ben­e­fit is ac­tu­ally quite mod­est. In 2016, 41.2 mil­lion re­tired work­ers re­ceived an av­er­age monthly ben­e­fit of US$1,360.13.

While Amer­i­can fam­i­lies count on this pro­gram, So­cial Se­cu­rity faces a long-term fi­nan­cial chal­lenge, as the lat­est an­nual trustees re­port shows.

Ba­si­cally So­cial Se­cu­rity works like this: To­day’s work­ers pay for the ben­e­fits of re­tirees via the payroll tax. For most of the past 35 years, work­ers paid more into the sys­tem than re­tirees re­ceived in ben­e­fits, cre­at­ing a sur­plus that was in­vested in in­ter­est-ac­cru­ing trust funds.

The trustees re­port stated that the fed­eral govern­ment will have to tap So­cial Se­cu­rity re­serves to pay a small por­tion of promised ben­e­fits in the cur­rent fis­cal year for the first time since 1982. They also pro­jected So­cial Se­cu­rity can con­tinue to pay 100 per­cent of ben­e­fits through 2034 by re­ly­ing in part on the money in the trust funds.

At that point, the trust funds will be de­pleted, and Congress will need to de­cide whether to in­crease rev­enue, cut ben­e­fits or both. Oth­er­wise, So­cial Se­cu­rity will be able to pay just 79 per­cent of promised ben­e­fits in 2035 and a lit­tle less for the fore­see­able fu­ture.

So­cial Se­cu­rity’s pro­jected short­falls over the com­ing decades are larger than ini­tially es­ti­mated be­cause, as my re­search has shown, ris­ing eco­nomic in­equal­ity has pushed more in­di­vid­ual in­come be­yond the reach of its payroll tax, which was capped at $127,200 in 2017. This has meant less rev­enue and higher costs than pro­jected.

De­spite the alarmist head­lines, how­ever, this is nei­ther the end of the world or the end of So­cial Se­cu­rity. The trust funds were never in­tended to be left alone – and in­deed have been tapped many times since they started.

In other words, ad­dress­ing the fi­nan­cial short­fall poses a man­age­able long-term chal­lenge. For ex­am­ple, in­creas­ing the payroll tax by just 2.88 per­cent­age points would cover the ex­pected short­fall over the next 75 years.

The an­nual short­fall is also equiv­a­lent to about 1 per­cent of U.S. gross do­mes­tic prod­uct. To put this in per­spec­tive, that’s less than the 1.4 per­cent of GDP the re­cent tax cuts are pro­jected to cost in 2019.

Paying for So­cial Se­cu­rity’s long-term fi­nan­cial short­fall is a mat­ter of pol­icy choices and po­lit­i­cal will. In my opin­ion, it is not an in­sur­mount­able eco­nomic ob­sta­cle.

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