Speaking at the Pension Research Council’s 2006 Retirement Symposium, at the University of Pennsylvania in Philadelphia, Lockhart said that the combination of people living longer and a low birth rate is creating an unsustainable system in Social Security, which last year paid $522 billion to 48 million recipients. And, according to Lockhart, “something has to give.”
Cash flow will peak in two or three years, followed by a rapid fall off, leading to negative cash flow beginning in 2017, according to Social Security Administration projections. To cover the projected 75-year and so-called “infinite horizon” shortfalls, will require $4 trillion and $11.1 trillion, respectively, Lockhart detailed. Paying the scheduled benefits using the current “pay as you go” method, would require increasing withholding taxes 46%, he explained – and if current tax rates were maintained, the required benefit cuts would be dramatic.
Luckily, “people are very much into Social Security and into reforming Social Security,” he said, citing three options to strengthen Social Security: increasing taxes, implementing a slow(er) growth in benefits, and increasing the investment rate of return on Social Security funds. Of those three, increasing taxes appears to be the most popular, he said. As for increasing the rate of return, there are multiple ways to accomplish the third solution, he said, because there can be direct investment by the Social Security trust fund in stocks and bonds, or personal accounts created from payroll taxes, or personal accounts created from additional contributions.
At the conference lunch, Lockhart used a Social Security simulator to show how changes in taxes, benefits and indexing can affect the sustainability and estimated shortfall of the system, using three examples. For example, if payroll taxes are increased by 1% and the retirement age is gradually raised to age 70 in 2084, the system is not sustainable, although it does eliminate 90% of the $4 trillion shortfall. Another solution often suggested is raising the maximum taxable wages to $155,000, which also does not lead to sustainability of the system, Lockhart showed, and also only reduces the shortfall by $1.8 trillion.
The only solution showed that produced a sustainable future for Social Security was to index benefits progressively and index to longevity, coupled with a 2.5% move into personal accounts.
Although we won’t see much action this year, Lockhart said, “Social Security reform will not go away,” and hopefully everyone will become reengaged next year.