While the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds are projected to become depleted in 2034, the Center for Retirement Research at Boston College maintains that if legislators were to mandate a small increase in payroll tax contributions to the funds, Social Security could remain solvent for the foreseeable future.
The Center’s latest issue brief, “Social Security’s Financial Outlook: The 2015 Update in Perspective,” which takes a deep dive into the Social Security Trustees’ latest report, notes that the program faces a 75-year deficit. The OASDI funds will be exhausted by 2034, with the Disability Insurance trust fund on scheduled to run out of money next year, in 2016.
“The specifics for 2015 show a little improvement,” the Center says. “The 75-year deficit declined from 2.88% in 2014 to 2.68% in 2015, and the date of trust fund exhaustion moved from 2033 to 2034.” The key problem, the Center says, is that as Baby Boomers continue to retire, the ratio of workers to retirees will fall from 3:1 to 2:1.
The assets in the trust fund are currently equal to three years of benefits. “Before the Great Recession, these cash flow surpluses were expected to continue for several years, but the recession-induced decline in payroll taxes and uptick in benefit claims caused the cost rate to exceed the income rate in 2010,” the Center says. By 2020, taxes and interest will fall short of annual benefit payments, so the government will need to draw down trust fund assets to meet benefit commitments.
NEXT: Social Security isn’t bankrupt
This does not mean that Social Security will become bankrupt, the Center says. Payroll tax revenues would be able to cover 75% of currently legislated benefits through 2034. However, that would mean that Social Security payments for the typical 65-year-old retiree would drop from 36% of pre-retirement earnings to 27%.
The key number to focus on, the Center for Retirement Research says, is the long-run deficit of 2.68% of covered payroll earnings. In other words, if Congress raised payroll taxes by 2.68 percentage points—splitting the responsibility evenly to 1.34 percentage points each for the employee and the employer—the government would be able to keep the current level of benefits for all retirees through 2089.
As to the exhaustion of the Disability Insurance (DI) in 2016, the Center has another solution. Congress could reallocate 0.6 percentage points from the OASI program to the DI program, as it successfully did in 1994, the last time the DI program was about to run out of money. This would prolong the DI trust fund by 18 years, from 2016 to 2034, while advancing the OASI fund’s depletion by just one year, from 2035, to 2034.
“The changes required to fix the system are well within the bounds of fluctuations in spending on other programs,” the Center for Retirement Research concludes. “For example, defense outlays went down by 2.2% of GDP between 1990 and 2000 and up by 1.8% of GDP between 2000 and 2010. Stabilizing the system’s finances should be a high priority to restore confidence in our ability to assure working Americans that they will receive the income they need in retirement.”
The Center’s full report can be downloaded here.