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The Perilous Path of Social Security
By Katie Southwick
August 26, 2008

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Looking Out to the Next 75 Years

While Social Security is well financed for the next ten years, the OASDI trust fund
is predicted to eventually deplete. According to the Trustees, OASDI cost will increase at a faster rate than tax income over the next 75 years. From 2010 to 2030, the majority of the baby boom generation will retire, putting a strain on resources. By 2017, annual cost will exceed tax income. To cover these additional costs, special funds from the Treasury will be redeemed. By 2041, even these redemptions will be exhausted. Furthermore, the OASDI annual cost rate is predicted to increase from 11.20% of the taxable payroll in 2008 to 16.41% in 2030. By 2082, cost rate will increase to 17.50%, which is 4.20% more than the projected income rate. Individually, the Trustees also estimate that the DI trust fund will be exhausted by 2025 and the OASI trust fund will run out by 2042.

Addressing Potential Shortfalls

To address potential shortfalls in Social Security, both presidential candidates have recommended policies. Democratic candidate Barack Obama hopes to protect and strengthen Social Security by preventing privatization. He proposes a bi-partisan plan that will ask Americans earning over $250,000 to contribute additional payroll taxes to Social Security. This plan will be implemented ten years from now, to address Social Security’s long-term solvency. Furthermore, Obama plans to strengthen retirement savings by eliminating income taxes for seniors making less than $50,000 and creating automatic workplace pensions for workers. Republican candidate John McCain believes that we should strengthen Social Security by supplementing it with personal accounts, and he believes that this can be accomplished without raising taxes. He also hopes to modernize Social Security by bringing choice and competition to entitlement programs.

Economists and think-tanks also propose solutions. The Heritage Foundation, a conservative think-tank, believes we must make changes immediately. Four million baby boomers turn 55 each year, placing a strain on the program. With more recipients and increasing costs, they propose three solutions. First, they advocate adjusting benefits based on income. Using “progressive indexing,” which indexes initial benefit levels to price inflation, rather than wage growth, additional costs will be eliminated. Next, they believe that individuals should create personal accounts to supplement Social Security. Finally, they propose raising the retirement age by two months per year until it reaches 70, at which point the average life expectancy (or “retirement period”) is 17 years. 

Like the Heritage Foundation, other groups advocate increasing the retirement age. Last week, the American Academy of Actuaries issued a statement that proposed raising the early retirement age from 62 to 69. According to their statement, increasing the retirement age would equal a 14% average cut in retirement benefits. Many believe that this change is both unfair and ineffective. According to Bernard Wasow, of the liberal think-tank Century Foundation, increasing the retirement age will hurt low-income workers. Statistics show that poorer people die at an earlier age; thus, they will be affected disproportionately. Instead, Wasow believes that Social Security is not in crisis, and privatization plans will undermine guaranteed minimum retirement income and increase federal debt.

Challenging the Assumptions in Social Security Projections

Some challenge the assumptions of the Trustee’s projections. For example, John Williams, who runs an online newsletter, believes that Social Security payments have been declining in real dollars.  [See our article on Williams’ analysis.] According to Williams, inflation is understated by as much as 7% each year, as Consumer Price Index (CPI) numbers are misreported. This flawed methodology reduces Social Security payments by 50%. Williams claims Social Security checks would be doubled if changes to CPI calculations had not been made. Furthermore, he believes understated rates of inflation affect GDP calculations. While CPI is not used to calculate GDP, there is a relationship between the two values. If calculations employ understated inflation rates, higher inflation-adjusted rate of GDP growth get reported. Thus, growth rates are misrepresented.

Similarly, Dean Parker, co-director of the Center for Economic and Policy Research, believes projections underestimate immigration. According to the US Census Bureau, immigration will rise from 1.3 million per year to more than 2 million by the middle of the century. Yet, the Trustee’s projections assume immigration will decrease to a little over 1 million a year by the middle of the century. Ultimately, Parker believes increased immigration will improve Social Security’s financial status. If Census reports are correct, around 30% of the projected Social Security shortfall would be eliminated due to immigration, he says.

Ultimately, the Trustees believe changes must be made to maintain Social Security’s solvency. With informed discussion and timely legislation, they believe that Social Security can be preserved for future generations. Social Security is well funded and, with modest changes, we can insure ongoing solvency.  However, these changes must be enacted sooner, rather than later.

Katie Southwick is an intern working for Advisor Perspectives this summer.

 

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