Chart - OASI, DI, and HI Trust Fund RatiosSocial Security’s trustees confirmed in their 2015 annual report on July 22 that the Old Age and Survivors Insurance and Federal Disability Insurance (OASDI) trust funds are heading for insolvency.

The combined trust funds will be depleted in 2034, and beneficiaries, who then must rely solely on payroll tax revenue for their benefits, will be hit with a 20 percent cut. This doomsday scenario can be averted if Republicans and Democrats in Washington DC work together to put Social Security on a sound financial footing.   

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Social Security Trust Fund Exhausted in 20 Years

Wed Jul 29, 2015

Social Security’s trustees confirmed in their 2015 annual report on July 22 that the Old Age and Survivors Insurance and Federal Disability Insurance (OASDI) trust funds are heading for insolvency.

The combined trust funds will be depleted in 2034, and beneficiaries, who then must rely solely on payroll tax revenue for their benefits, will be hit with a 20 percent cut. This doomsday scenario can be averted if Republicans and Democrats in Washington DC work together to put Social Security on a sound financial footing.

The chart below from the SSA.gov report shows that because annual benefit payments have exceeded annual payroll tax revenues since 2010, and because this cash flow deficit is expected to continue, the Old Age and Survivors Insurance Trust Fund (OASI), nominal source of Social Security benefits, will be exhausted by 2035.

Chart E–OASI, DI, and HI Trust Fund Ratios

[Asset reserves as a percentage of annual cost]

Chart - OASI, DI, and HI Trust Fund Ratios

In other words, the U.S. is fast approaching the date that the Social Security Trust Fund will be empty and annual payroll tax revenues will be insufficient to pay Social Security benefits at current levels. Far from it.

Say the trustees: “To appreciate these dangers, consider that under the Trustees’ current projections, annual Social Security costs will be more than 25 percent higher than income by 2034.”

Not to put too fine a point on it, assuming trust fund depletion occurs by 2035 and requires a 20 percent cut in benefits, and also assuming no bipartisan action to restructure Social Security’s finances, those born since 1967 who expect to reach age 67 in 2034 and later could be surprised—and not in a good way.

Demographics is Destiny—

The driver of Social Security’s financial difficulties, of course, is demographics, the so-called worker-retiree ratio. Back in the day the number of workers paying Social Security payroll taxes far exceeded the number of retirees drawing benefits. It was estimated at 8.6 to 1 in 1960. The trustees say the worker-to-retiree ratio now stands at about 2.7 to 1 and will approach 2 to 1 by 2034.

The demographics are compelling—the U.S. must choose between slashing Social Security benefits by 20 percent to align payments with payroll tax revenue or restructuring Social Security through a combination of tax increases and benefit adjustments.

Political Good News—

Ideally President Obama and the Republican-controlled Congress or former President Bush and the then-Democrat-controlled Congress would have forged a bipartisan compromise to “save Social Security” and solve this problem.

Alas, political polarization and Washington gridlock have made that impossible.

But the good news is that a few presidential candidates are offering suggestions to fix Social Security in 2017. One candidate has recommended that the eligibility age for “full” Social Security benefits be increased from the present 67 to 69 or even 70. Another has suggested “means-testing” Social Security by eliminating benefits for individuals with more than $200,000 a year in non-Social Security income.

On the tax side one or two candidates have recommended raising the Social Security taxable wage base, currently $118,500. To be sure, that would raise questions about whether the employer payroll tax share would also go up and whether Social Security benefits, now linked to taxes paid, should reflect the higher taxes.

The annual report of the Social Security trustees serves as a national reminder that the original Social Security, enacted in 1935, may need to reflect 21st Century demographics. Hopefully the report will also motivate Republicans and Democrats to redouble their efforts to save Social Security from insolvency—and make sure it’s there for our children and grandchildren.