Sunday, August 17, 2014

2014 Social Security Trustees Report

The Trustees of the Social Security Trust Funds released their report on July 28th.  The details of the report clearly show that the crisis in Social Security is not only deepening but widening as well.

The conventional measure of the report is the exhaustion point of the Trust Fund, which continues to be 2033. That is the point at which financial consequences start falling on retirees.  That date didn't change, but every other measure of the crisis has changed for the worse. 

The reasonable solvency of the system was reduced over the course of 2013 from 19 years to 18 years.  This reduction means that for the first time in history on average someone retiring today at normal retirement age expects to outlive full benefits.  Anyone who is 48 years old or younger roughly expects to retire after the system pays depleted benefits.  This, believe it or not, is the good news.

The bad news is that the size of the crisis arriving in 2033 is growing rapidly.  The report reveals that the unfunded liabilities now exceed the Gross Domestic Product of the entire county.  The financing shortfall grew by $1.8 trillion.  The growth means that Social Security created more than $2 of broken promises for every dollar that it collected ($855 Billion in 2013). The grand total of unfunded liabilities exceeds all revenue ever collected by the system since its inception.

The other measure of the shortfall, the 75 year financing gap, tells us how much it will cost to kick the can.  This cost rose $1 trillion dollars, again more than the system collected in all forms of revenue. To solve this part of the problem we would have to raise payroll taxes from 15.3% to 18.18% (an increase of 2.88%).  In other words, the nation would need to divert roughly $10.6 trillion away from deficit reduction in order to make the Boomer’s problem an even larger problem for their children.

The report tells us that these broken promises will start falling on people in roughly 19 years.  The Trustees project that there is a 50% chance that the system will pay full benefits through 2032.  It is reasonable today to expect that more than 50% of voting aged Americans will retire after 2032.  Five years ago, a near majority of voting aged Americans expected to be completely unaffected by the shortfall.  Today, it is less than 20%.

Politicians assure us that we have time to fix the crisis.  It is ironic that Time is the one variable that we know with certainty is destructive to Social Security.  The 2014 report tells us that changing the valuation date from 2012 to 2013 meant that the system created $900 billion broken promises.  Another way to look at this problem is if we had diverted every penny spent on the military in 2013 to Social Security, the system would still have been worse off at the end of the year than it was at the beginning.

What should trouble people is that the Congressional Budget Office (“CBO”) provides similar projections on the Social Security system.  Every angle of CBO’s projections provides a more pessimistic forecast for Social Security.  CBO believes the crisis emerging in Social Security will be larger and arrive sooner than the Trustees.  They show that it will affect more people and require greater resources to ameliorate.  So it is possible that the Trustees are too optimistic. 

The problem with this coverage today is that it focuses on the length of the fuse rather than the size of the bomb.

 

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