A commentary by one of the public trustees for United States Medicare and Social
Security has concluded that the latter’s future, at least in its present
form, is now ‘greatly imperilled’ as the last few years of legislative
neglect have drastically harmed the programme’s future financial prospects.
Charles Blahous, a senior research fellow at the Mercatus Center at George
Mason University, and a public trustee for Medicare and Social Security, has
warned that “individuals now planning their financial futures, whether
as taxpayers or as beneficiaries, should be pricing in a substantial risk that
the federal government will not be able to maintain Social Security as a self-financing,
stand-alone programme over the long term".
"If Social Security financing corrections
are not enacted in 2013, or at the very latest by 2015, it becomes fairly likely
that they will not be enacted at all,” Blahous warns.
Published in April this year, the 2012 Social Security Report on the strength
and viability of US retirement and disability programmes, has already pointed
out that funding pressures on them are mounting.
Overall, it was projected that, when considered on a combined basis, Social
Security’s retirement and disability programmes have dedicated funds sufficient
to cover benefits for the next 20 years, but in 2033, incoming revenues and
trust fund resources will be insufficient to maintain payment of full benefits.
After that time, dedicated funds will be sufficient to cover about three-quarters
of full benefits.
At the end of 2011, the Social Security programmes were providing benefits
to about 55m people, and, during the year, an estimated 158m people had earnings
covered by Social Security and paid payroll taxes. However, Social Security’s
cost continued to exceed both the programme’s tax income and its non-interest
income, a trend that is projected to continue throughout the short-range period
The projected Social Security annual cost rate increases from 13.83% of taxable
payroll for 2012 to 17.41% for 2035, and to 17.83% for 2086. Expressed in relation
to projected gross domestic product (GDP), Social Security costs rise from the
current level of 5.0% of GDP to about 6.4% by 2035, and then declines to around
6.0 through 2086. For the 75-year projection period, the actuarial deficit is
2.67% of taxable payroll, 0.44% larger than in last year’s report.
Blahous pointed out that: “figures such as 2033 and 2.67% make
it appear – incorrectly – as though there are several years remaining
to act, and only a modest problem to solve.” There are also, he added,
a multitude of proposals available that would attempt to rectify the problem.
He indicated that political proposals from the right tend to focus on
cost containment (for example, slowing the growth of benefits and/or raising
eligibility ages), whereas proposals from the left tend to focus on raising
taxes. However, he added that “this multitude of proposals in no way implies
that a solution is readily achieved.”
In his opinion, "a solution is rapidly becoming more difficult “because
the baby boomers are starting to retire, and lawmakers have historically been
very reluctant to cut benefits for beneficiaries once they start receiving them.”
"This means that any sacrifices will likely be concentrated on younger generations
who already face net income losses through Social Security as it is,”
he continued. “With every further year of delay lawmakers must therefore
consider sharper benefit growth reductions and/or tax increases,” and
a political compromise becomes ever more difficult to achieve.
Blahous considered that the proposal, from one side of the political spectrum,
to slow future benefit growth to the rate of price inflation for high earners,
while allowing low-income earners the higher growth rate of wage inflation and
leaving previous beneficiaries unaffected, would no longer work. In fact, “even
if we slowed everyone’s benefit growth – from the poorest to the
richest – to price inflation, we could no longer maintain solvency while
holding harmless those over the age of 55.”
On the other hand, “the efficacy of tax-increase solutions is also fading
with delay. Advocates on the left sometimes argue to increase the amount of
Social Security wages subject to the payroll tax. The most extreme version of
this proposal would be to raise the amount of wages subject to the full 12.4%
payroll tax - USD110,100 today - up to infinity. Yet even this drastic measure
would now fail to keep Social Security in long-term balance as well.”
“We are thus approaching the point where each side would have difficulty
balancing Social Security finances even if it could dictate the solution,”
he concluded, “and rapidly passing the point where a compromise solution