Unless Washington acts soon to strengthen Social Security’s finances, the Trust Fund will run out of money in twenty-one years—in 2033 to be exact.

That grim forecast comes from the latest report of the Social Security trustees, who just last year predicted the reckoning would come three years later—in 2036. An accompanying chart shows the fundamental mismatch between Social Security (OASDI) revenue and costs.

Social Security’s finances are being hammered by three reinforcing trends: persistent high unemployment that lessens incoming payroll tax revenues; waves of retiring baby boomers claiming their benefits; and high energy prices that have necessitated greater cost-of-living adjustments.

In short, Social Security benefit payouts are more than expected and FICA payroll tax revenues are less than expected. Read more.

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Social Security: Broke in 2033?

Wed May 9, 2012

Unless Washington acts soon to strengthen Social Security’s finances, the Trust Fund will run out of money in twenty-one years—in 2033 to be exact.

That grim forecast comes from the latest report of the Social Security trustees, who just last year predicted the reckoning would come three years later—in 2036. An accompanying chart shows the fundamental mismatch between Social Security (OASDI) revenue and costs.social-security-broke-in-2033.jpg

Social Security’s finances are being hammered by three reinforcing trends: persistent high unemployment that lessens incoming payroll tax revenues; waves of retiring baby boomers claiming their benefits; and high energy prices that have necessitated greater cost-of-living adjustments.

In short, Social Security benefit payouts are more than expected and FICA payroll tax revenues are less than expected.

What does it mean exactly that the Social Security Trust Fund will go bust in 2033 unless Washington acts?

Since the last Social Security restructuring almost 30 years ago up until 2010, annual payroll tax revenue inflows exceeded annual benefit payments, a positive cash flow resulting in huge surpluses building up in the trust fund. Starting in 2010, however, annual benefit payments began to exceed FICA tax revenue, a negative cash flow of $49 billion in 2010, requiring the Social Security Administration to tap into its accumulated surplus.

Negative cash flows are forecast to continue for years to come, e.g., $60 billion this year, eventually draining the trust fund of its entire historical surplus. In 2033, when the last penny has been spent on benefits, say the trustees, Social Secuity will be able to pay out each year only an amount equal to what it takes in from payroll taxes—about 75% of what is paid out today.

In other words, sharp benefits cuts starting in 2033 for those collecting Social Security.

This explains why the trustees, in announcing the bad news, urged Congress to act promptly and on a bipartisan basis, to shore up Social Security for the long term.

Saving Social Security will require Congress and the President, republicans and democrats, to agree on some combination of three distinct steps—probably next year:

One, scale back benefits growth, possibly by using a different price index to calculate future benefit increases. Benefits would continue to grow, but at a slower rate. Lawmakers might also consider raising the eligibility ages for reduced and full retirement benefits, now ages 62 and 66 respectively.

Two, higher payroll taxes, possibly by raising the taxable wage base to $150,000 to $200,000. This would target the tax hike on higher income individuals.

And three, resolve not to extend the 2% Social Security tax “holiday” in effect for 2011 and 2012. This tax break siphons off over $100 billion a year that was earmarked for the Social Security trust fund. To be sure, the U.S. Treasury compensates for the loss of payroll tax revenue by selling more government debt and transferring the proceeds to the trust fund. But in principle, payroll tax revenue is intended for Social Security benefits, not short term economic stimulus.

Finally, the prerequisite for constructive legislative action to save Social Security is a recognition by leaders of both political parties that the program is in financial jeopardy and needs to be restructured. Until now a politically gridlocked Washington seems to have been unable to see that Social Security, like the “unsinkable” Titanic of 100 years ago, is heading for an iceberg.

One can only hope that last month’s report and the pleas for action of the trustees themselves will spark the leadership needed for a bipartisan solution. The loud sound we—and our political leaders—are hearing is the ticking of the Social Security insolvency clock. Time is running out.