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Social Security Is Heading For Crisis Faster Than We Thought

By Guest Post. Originally published at ValueWalk.

Do you find comfort in the fact that people have been warning about the demise of Social Security for 30 years?

The latest data from the Social Security trustees says don’t because the doomsayers have been generally overly optimistic.

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Social Security
By US Government (Social Security Administration) [Public domain], via Wikimedia Commons

The program’s condition at the end of the past year was worse than we forecast back in 1983 according to the last report. In 1983, the program’s measure of solvency was positive, where as today it is roughly $12.5 trillion in the hole. In 2016 alone, the program created roughly $1.2 trillion of unfunded liabilities. These are promised benefits for which no one expects it to generate cash.

What Do We Make of These Numbers?

The Trustees report say that about 2/3rds of this change results from the passage of time. Every year, the clock ticking adds another few hundred billion to the mix.

This isn’t unexpected. Back in 1983, when Congress came together in a flash of bipartisanship to save Social Security with its package of tax increases and benefit cuts, its members knew full-well that by 2017 the program would largely be back in the red.

Fixed = Kicking the Can

When we think of the word “fixed,” we generally associate it with the concept of “no problem.” Within the discussion of Social Security, however, the word “fixed” measures the cost to kick the can 75 years.

That definition hasn’t changed in 30 years. If we had asked the Trustees in 1983 where they expected the program to be in 2017, they likely would have said that is too far to know. Pushed to an answer, they would have said that the program would likely have about $8 trillion in unfunded liabilities, most of which would fall between 2058 and 2091. Today, the unfunded liabilities should start in 2034.

Bigger With Every Kick

The reason is that the definition of solvency changes every year. In the case of 2017, we replaced a low-cost year of 2016 with a very high-cost year of 2091 in the window of solvency. Every year this job gets harder.

The other factor is mathematical. We express the gaps of the system in a “present-value” sense. If you think about 2091, it is a long way off. So a dollar isn’t really a dollar. In 2017, that cost is really something closer to a dime. As you get closer to 2091, the cost rises until it is a whole dollar.

The trustees express that shortfall or “actuarial balance” in terms of “percent of covered wages” because payroll taxes are largely how we pay for the program. When they say “2.83 percent of covered wages,” it means that Social Security would likely pay promised package benefits through 2091 if the payroll taxes were increased by 2.83 percent to 18.13 percent.

In 2092, however, the system would be as broken as it is today.

The Key Takeaways

Demographics Were a Plus

While most bemoan the Baby Boomers as the cause of Social Security’s ills, the Trustees Report says that changes to demographic assumptions have made the system modestly more solvent rather than less.

Solutions Erode With Time

Voters who want politicians to pursue solvency strategies need to understand time will erode solvency solutions. Solvent this year does not mean solvent for 1 year much less 75. The 1983 reform officially kept the program solvent for 2 years. By 1985, the cushion was gone.

Time Is an Every-Year Cost

Another thing that hasn’t changed is that the can gets bigger with every kick. Absent structural change the shortfalls widen into eternity. So we are largely solving our problem by creating an even bigger problem for our children.

Critics in 1983 Were Right

If you find comfort in the fact that people have been saying that Social Security is heading for crisis, understand that the numbers suggest that they were wrong. The crisis will be larger and will occur sooner than the experts believed in 1983.

By Brenton Smith This article originally appeared on NewsMax.Com, (“The Current State of the Social Security Trust Funds)

The post Social Security Is Heading For Crisis Faster Than We Thought appeared first on ValueWalk.

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