The growing Social Security dilemma

Written by Andrew Szabo
Wednesday, 22 June 2011 23:00

This week, let’s continue our review of federal entitlement programs and their fiscal problems by considering Social Security.

The Social Security program is massive. As of 2009, it paid benefits to 36 million retired workers and their dependents, six million survivors of workers, and 10 million disabled workers and their dependents. During that year, approximately 156 million people made contributions to the system through payroll taxes.

Relative to Medicaid (especially for fiscally troubled states) and the Medicare program, Social Security faces a longer-term problem, though nonetheless real.

According to the 2010 Old-Age Survivors and Disability Insurance Trustees Report, the dollar assets of the trust are expected to be drawn down beginning in 2025 and exhausted by 2037. In the 75-year forecast, expenses will exceed income every year beginning in 2015, but interest income will prevent a decline in the nominal size of the combined trust fund until a decade later.

The main problem facing the trust funds is the aging of the Baby Boom generation, with greater numbers each year entering retirement than entering the Social Security paying workforce, though the problem eases somewhat after 2035, as many of the Boomers will have already retired.

Considered separately, the Disability Insurance Trust Fund is expected to have outlays exceed income by 2013 and to be exhausted by only 2018. “Therefore, the DI Trust Fund does not satisfy the test of short-term financial adequacy.” Some kind of resetting of the split of payroll proceeds between OAD and DI will soon be needed, as was done before in 1994.

Proposals to reform either Social Security or Medicare are the ultimate political hot potato, as the beneficiaries include large numbers of middle class people who vote regularly and who fear change. Arguably, these programs should have been limited by need. If they had been, we could probably then reform them based on rational criteria such as increasing average lifespan and wellness. The framers of these programs made them unassailable by making them benefit a much large group than those in clear need. Any politician who proposes substantive reform, no matter how level-headed, risks political suicide.

The projected shortfalls in Social Security can be solved, but they are not trivial. The trustees state that for the combined trust funds to stay solvent for the projected 75-year period, either the payroll tax could be lifted by a hefty 1.84%, or benefits could be reduced pro rata, or tax revenues equal to $5.4 trillion in today’s dollars could be transferred to the trusts, or some combination of these. Similar to my conclusions in the earlier article, “Paralysis of the Body Politic,” I don’t expect Congress to act meaningfully on these needs until, at the earliest, after the next presidential election, and possibly not until the market forces our hand through a crisis of confidence in U.S. Treasury debt, making our government’s potential refinancing costs on the national debt soar.

Andrew Szabo is managing director dba Greenwich Financial Management Inc. Securities offered exclusively through Choice Investments Inc., member FINRA/SIPC. Comments and questions, contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .