Social Security's financial outlook took another hit this week, as the Congressional Budget Office hiked its estimate for cash deficits from 2013 to 2022 by $212 billion.
The wider deficits — mainly due to weaker revenue estimates — mean a quicker depletion of Social Security's trust fund, after which the program could only afford to pay about 75% of benefits.
Last year, IBD was on the money in predicting, based on CBO's 10-year outlook, that the Social Security Administration would move up the trust fund exhaustion date to 2033 from 2036. Now IBD finds that CBO's fresh estimates point to the trust fund running dry in 2031, though the retirement program's actuaries don't rely on CBO data.
While the trust fund's nonmarketable Treasuries — really IOUs from one branch of government to another — have no value to offset the cost of benefits, they provide Social Security the legal authority to run cash deficits until they're spent.
Already, the Social Security Trust Fund's scheduled 2033 demise means that workers just becoming eligible for Social Security at age 62 face steep future benefit cuts under current law if they live to the average life expectancy, now about 84.
The likelihood that the trust fund depletion will be moved up again — perhaps to just 18 years from now — means that the benefit cuts would hit today's new retirees when they turn 80.
Abrupt benefit cuts of about 25% a year would come at an especially bad time — late in life when savings have dwindled and health care bills are on the rise.
Avoiding this scenario is a key reason to reform Social Security, even apart from the program's impact on rising debt levels.
Meanwhile, workers 44 years old who may be more than halfway through their working careers face the prospect of retiring after the trust fund is bust.
To offset a 25% lifelong benefit cut with 18 years of saving would require that average earners set aside about 6% of annual wages, assuming Treasury returns and a lifelong annuity.
In practice, 25% across-the-board cuts in benefits upon trust-fund exhaustion would be untenable, because they would disproportionately hurt the very old, near-poor and disabled.
Denying The Problem
The political left and groups like AARP have insisted that Social Security be kept out of deficit-reduction efforts, arguing that the program doesn't add to deficits.
Actually, every dollar Treasury has to borrow when Social Security cashes in trust-fund bonds adds a dollar to the unified budget deficit and the public debt. CBO projects that Social Security faces a $1.4 trillion cash shortfall from 2013 through 2023. Interest on that extra debt will raise the tab even higher.
The budget scorekeeper said revenue estimates were lower "because recent tax returns show a smaller amount of wages covered by Social Security than CBO estimated.
The pattern, which CBO expects to continue, may reflect a greater share of earnings going to people with wages over the payroll tax ceiling, now $113,700. It also may reflect a bigger share of compensation going to employer health coverage.
That all workers 62 and younger face steep future benefit cuts should, in theory, make Social Security reform more popular. Workers in their 20s and 30s have an interest in seeing reforms put in place sooner than later so the brunt of the burden and debt doesn't fall upon them.