Deficits will dwarf Social Security surplus

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Stephen Ohlemacher

As millions of baby boomers flood Social Security with applications for benefits, the program's $2.7 trillion surplus is starting to look small.

For nearly three decades Social Security produced big surpluses, collecting more in taxes from workers than it paid in benefits to retirees. The surpluses also helped mask the size of the budget deficit being generated by the rest of the federal government.

Those days are over. Since 2010, Social Security has been paying out more in benefits than it collects in taxes, adding to the urgency for Congress to address the program's long-term finances.

“To me, urgent doesn't begin to describe it,” said Chuck Blahous, one of the public trustees who oversee Social Security. “I would say we're somewhere between critical and too late to deal with it.”

The Social Security trustees project the surplus will be gone in 2033. Unless Congress acts, Social Security would only collect enough tax revenue each year to pay about 75 percent of benefits, triggering an automatic reduction.

Lawmakers from both political parties say they want to avoid such a dramatic benefit cut for people who have retired and might not have the means to make up the lost income. Still, that scenario is more than two decades away, which is why many in Congress are willing to put off changes.

Snowballing shortfall

But once the surplus is spent, the annual funding gaps start off big and grow fast, which could make them hard to rein in if Congress procrastinates.

The projected shortfall in 2033 is $623 billion, according to the trustees' latest report. It reaches $1 trillion in 2045 and nearly $7 trillion in 2086, the end of a 75-year period used by Social Security's number crunchers because it covers the retirement years of just about everyone working today.

Add up 75 years' worth of shortfalls and you get an astonishing figure: $134 trillion. Adjusted for inflation, that's $30.5 trillion in 2012 dollars, or eight times the size of this year's entire federal budget.

Social Security Commissioner Michael J. Astrue said he is frustrated that little has been done to solve a problem that is only going to get harder to fix as 2033 approaches. If changes are done soon, they can be spread out over time, perhaps sparing current retirees while giving workers time to increase their savings.

“It won't be easy but it's just going to get harder the longer they wait,” Astrue said.

There is no consensus in Washington on how pressing the problem is.

President Barack Obama created a deficit-reduction commission in 2010, but didn't embrace its plan for Social Security: raising the retirement age, reducing benefits for medium- and high-income workers, and raising the cap on the amount of wages subject to the payroll tax, all very gradually.

The issue has been largely absent from this year's presidential election. Neither Obama nor his Republican opponent, Mitt Romney, has made it a significant part of the campaign.

Blahous, a Republican, warns that the magnitude of the problem is becoming so great that “Social Security's days as a self-financing program are numbered” if Congress doesn't act in the next few years. Democrat Robert Reischauer, Social Security's other public trustee, is less dire in his predictions but has told Congress that it needs to act within five years.

Is it really so bad?

Others express less urgency.

“I would like to see Congress move on this tomorrow, but we do have 22 years before there is any cut in Social Security benefits,” said Sen. Bernie Sanders, a liberal independent from Vermont who heads the Senate Social Security caucus.

“Compared to other crises — the collapse of the middle class, real wages falling for American workers, 50 million people having no health insurance — how would I rate the Social Security situation? Nowhere near as serious as these and many other problems,” Sanders said.

AARP, the nation's most powerful lobbying group for older Americans, agrees. “I'm not suggesting we need to wait 20 years, but we do have time to make changes to Social Security so that we can pay the benefits we promised,” said David Certner, AARP's legislative policy director. “Let's face it. Relative to a lot of other things right now, Social Security is in pretty good shape.”

Social Security's finances are being hit by a wave of demographics as aging baby boomers reach retirement, leaving relatively fewer workers behind to pay into the system.

In 1960, there were 4.9 workers paying Social Security taxes for each person getting benefits. Today, there are about 2.8 workers for each beneficiary, a ratio that will drop to 1.9 workers by 2035, according to projections by the Congressional Budget Office.

About 56 million people now collect Social Security benefits, and that is projected to grow to 91 million in 2035.

Despite the severity and extent of the problem, the solution needn’t be draconian. The Social Security Administration says if payroll taxes were increased by 2.67 percentage points, to a little more than 15 percent (half from employers; half from employees), they would generate enough money to cover the 75-year shortfall, with some left over.

To read the 2012 Social Security Trustees report, see www.ssa.gov/oact/tr/2012/index.html.

Small Social Security COLA next year

More than 56 million Americans on Social Security will get raises averaging $19 a month come January, one of the smallest hikes since automatic adjustments for inflation were adopted in 1975.

It’s expected that about a third of the 1.7 percent increase in benefits will get wiped out by higher Medicare premiums, which are deducted from Social Security payments. The Medicare premium hike had not yet been announced when the Beacon went to press, but is projected to be about $7 per month.

The cost-of-living adjustment, or COLA, is tied to a government measure of inflation. The small increase confirms that inflation has been relatively low over the past year, despite the recent surge in gasoline prices.

Congress has been considering changing the way the COLA is calculated by adopting a new inflation index that would result in even lower annual adjustments.

Social Security recipients received a 3.6 percent increase in benefits at the start of this year after getting none the previous two years.

In addition to retired and disabled workers, Social Security provides benefits to millions of spouses, widows, widowers and children. About 8 million people who receive Supplemental Security Income, the disability program for poor people, will also receive the COLA.

In all, the increase will affect about one in five U.S. residents.

— AP