Social Security 'Trust Fund' End: 2033

Investor's Business Daily

Neither political party wants to go near the third rail of Social Security in this election year, but new projections that program finances are rapidly deteriorating may make it impossible to ignore.

Congress will have to act to avert a sharp cut to disability benefits in 2016 — during either President Obama's second term or Mitt Romney's first. That's two years earlier than Social Security Administration actuaries projected a year ago.

The combined balances of Social Security's trust funds for the elderly and disabled will dry up in 2033, three years faster than previously seen.

Those balances — now $2.7 trillion — don't mean much for the government's ability to afford benefits; rather, they represent a promise from Treasury to cover any cash shortfall in Social Security until the trust funds are spent.

This year, Social Security is expected to run a third straight cash deficit, of $53 billion. Including the 2% payroll tax cut, the shortfall would be $165 billion.

While those payroll-tax revenues are still being credited to Social Security, the lack of consensus on what to do when the payroll tax cut expires is yet another election-year puzzle demanding answers.

While Medicare, which also got a gloomy financial update on Monday, remains a much bigger long-term problem, Social Security's finances have taken a sharper turn for the worse due to the lackluster recovery — and more straightforward accounting.

Medicare AlertIf not for Obama's health care overhaul, Medicare's hospital insurance (Part A) trust fund would be headed for bust in 2016, administration officials said.

Left unsaid was that Medicare curbs were passed to offset the cost of Medicaid and private insurance subsidies.

As it is, Medicare's Part A trust fund is seen running dry in 2024, the same as a year ago. Although current law assumes a range of cuts that Medicare's chief actuary describes as unlikely, the program is still projected to grow more than twice as fast as Social Security over the next three decades.

Social Security outlays are projected to rise from 4.9% of GDP last year to 6.3% in 2040. Over the same span, Medicare spending (including hospital insurance, drug benefits and physician services) is seen rising from 3.7% of GDP to 6% under current law.

Under more realistic assumptions, such as action by Congress to avert a 30% cut in physician reimbursements, Medicare's actuary expects costs would reach 6.5% to 7% of GDP by 2040.

Treasury Secretary Tim Geithner said the White House would seek a broad Social Security fix, rather than trying to avert a disability shortfall by shifting revenues from the better-funded old-age and survivors insurance trust fund.

Legislative action to make finances sustainable is "more criti cal than ever" said Social Security Commissioner Michael Astrue.

AARP said the report shows "modest" changes are needed, sooner than later, and that it's "time for a national conversation.

Some on the left downplayed the urgency of reform, with two decades of full funding remaining and resources to cover three-fourths of benefits after that.

But that ignores the shortfall's potential impact on different individuals. An IBD analysis shows that an average earner (about $43,000 a year) with 20 years to re tire would have to set aside more than 5% of wages each year to make up for a nearly 25% benefit cut. That assumes Treasury returns and a lifetime annuity.

Further, public trustee Charles Blahous noted that low-income and elderly beneficiaries would have to be protected from cuts, meaning the possibility of a bigger impact on others.

Blahous called for "responsible, decisive and prompt" action to repair Social Security's finances.

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