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New Social Security Retirees Will Outlive Official Trust Fund

For the first time since Social Security's cash crisis in 1983, the program can't afford to pay full benefits for its youngest crop of new retirees through life expectancy, government data show.

The hastening of the Social Security Trust Fund's demise to 2033 means that workers just becoming eligible for Social Security at age 62 face steep future benefit cuts if they live to the average life expectancy, now about 84.

Those abrupt benefit cuts of about 25% a year for today's 62 year olds and workers nearing the early retirement age 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.

But this turning point also is significant for symbolic reasons. Up until now, the very existence of the $2.7 trillion trust fund — $1.1 trillion in net cash surpluses since 1983 and $1.6 trillion in accrued interest — has made Social Security seemingly untouchable.

Old Contract Invalid

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.

A common argument on the left, recently espoused by AFL-CIO head Richard Trumka, is that benefit cuts for those who have paid into the trust fund would be unfair — some even say fraudulent.

"There is no justice at all in considering cuts to prepaid, earned-benefit programs like Social Security," Trumka wrote in a recent op-ed.

Yet the argument that benefit cuts would break a near-sacred contract is no longer valid now that full benefits are no longer prepaid. Benefit cuts are built into current law and, in effect, written into the contract with workers.

Under current law, a worker who just turned 62 would face a 25% benefit cut once the trust is spent in early 2033. If that worker claims benefits at 62 and lives to the average expectancy of 84, she would face the equivalent of a 1% cut in lifetime retirement benefits.

Workers now 61 would, on average, lose the equivalent of a half year in benefits and face a 2% cut in lifetime benefits.

Workers now 55 would, on average, lose two full years' worth of benefits, the equivalent of a 9.2% cut in lifetime benefits.

Demographic Destiny

Social Security's compact is already on course to change, not because of decisions in Washington to make the program less generous, but because of demographic shifts. The number of workers per beneficiary has fallen from 3.3 in 2007 to 2.9 in 2011, and will drop to 2.0 by 2034, Social Security's actuaries project.

If the trust fund still represents a compact that precludes benefit cuts, it would only logically remain in force for current retirees above 62. Yet the one reform idea kicked around in fiscal cliff talks would have cut Social Security's cost-of-living adjustments for all current beneficiaries.

The fact that all workers 62 and under 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.

An IBD analysis found that Social Security, under current law, would boost debt by 18% of GDP by 2032 — just before the trust fund runs out.

Workers in their 40s and 50s should also want to see reform so they don't face benefit cuts for which they haven't prepared by setting aside extra savings.

Average earners at the halfway mark of 40-year careers would have to save more than 5% of annual wages to overcome future benefit cuts, assuming Treasury returns and a lifetime 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.