Economic and Demographic Changes Although Social Security was intended to be self-sustaining over the long term, its financing is susceptible to factors unforeseen by its creators. As the United States has undergone significant demographic and economic changes over the decades since Social Security’s inception, Social Security’s projected date of insolvency has drawn closer. Some of the reasons cited by the trustees for these declines over the years have included decreased mortality, lower birth rates, higher incidences of disability, lower economic growth, reduced average hours of work, lower interest rates on the trust fund, and higher inflation. Additionally, legislative changes, such as enhanced and new benefits, have affected Social Security’s solvency. Insolvency Will Likely Come Even Earlier Over the past five years alone, the projected date of Social Security insolvency has declined by eight years. This most recent decline in projected insolvency is largely the result of the 2007–2008 recession. While some of the sources of reduced solvency—such as lower economic growth, lower wages, increased disability incidence, and lower birth rates—are hopefully temporary, other consequences of the recession are unlikely to be reversed. For example, the Social Security trustees now project lower average hours of work and higher rates of disability incidence well into the future, and the lifetime earnings of the long-term unemployed are likely to be permanently lower. Aside from a short period in the late 1990s and early 2000s, when the exceptionally strong economy pushed Social Security’s projected solvency date forward, Social Security’s financial trajectory has been decidedly negative. If the historical pattern of declining solvency continues, the Social Security trust fund could become insolvent in 2024, a full nine years sooner than currently projected.[5] Absent a bailout from general revenues, insolvency will result in immediate, across-the-board Social Security benefit cuts of about 23 percent.[6] Such benefit cuts would be particularly harmful to current retirees. The average 70-year-old today is probably not expecting to see the day that Social Security becomes insolvent. But if actual insolvency comes just 11 years from now, rather than 2033, that is just what will happen. Moreover, such drastic benefit cuts could come at a time when the most vulnerable Social Security recipients are neither prepared nor capable of sustaining substantial cuts in income. Those approaching retirement need time to plan and adjust their savings well in advance of any changes to Social Security. Waiting is simply not an option. Ad Hoc Reforms Do Not Work As history has demonstrated, ad hoc reforms—even those as significant as the 1983 reforms—will not generate lasting solvency for Social Security. Within just five years of the massive 1983 reforms, the Social Security trustees projected that the program had already lost 10 years of solvency. Furthermore, focusing on solvency over the 75-year horizon generates a false sense of security and can encourage reforms that initially boost Social Security’s finances but ultimately generate larger liabilities than assets. As it exists today, Social Security attempts to be both a defined-benefit and defined-contribution program. But with both the benefits it pays and the contributions it receives being subject to demographic and economic uncertainties, it is impossible for Social Security to maintain financial balance over the long run. To make Social Security permanently solvent and affordable, it should be converted it into a defined-contribution program, and benefit eligibility should be indexed to changes in life expectancy. Life expectancy in the U.S. has risen by 17 years since Social Security’s inception.[7] Indexing Social Security’s retirement age to life expectancy would prevent the program from paying out benefits for decades longer than originally planned. Furthermore, Social Security benefit eligibility and levels may need to be adjusted based on earnings profiles to better align each generation’s benefits with their contributions. Fix Social Security Once and for All Although Social Security is projected to remain solvent through 2033, its annual cash-flow deficits are already adding to federal deficits. As a Heritage Foundation report shows, Social Security ran a $55 billion cash flow deficit in 2012, and over the next 10 years, it will add nearly $1 trillion to U.S. deficits.[8] Moreover, history suggests the actual date of Social Security insolvency could come much sooner than 2033, perhaps as early as 2024—just 11 years from now. The current Social Security system is neither self-sustaining nor a true anti-poverty insurance program. These flaws could be fixed by indexing Social Security’s eligibility and benefits to changes in factors such as life expectancy and wages and by limiting benefits to those who need them most while providing a minimum benefit that would keep all beneficiaries out of poverty. —Rachel Greszler is Senior Policy Analyst in Economics and Entitlements in the Center for Data Analysis at The Heritage Foundation. heritage.org/research/reports/2013/06/history-suggests-social-security-insolvency-is-coming-sooner-than-projected
Posted on: Mon, 01 Dec 2014 23:36:23 +0000
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