In October, 2003, Jo Anne B. Barnhart, Commissioner of Social Security, sent me and hundreds of thousands of other January-born workers a report on our Social Security “accounts.” It told me about my wage history, my partial and full benefits at retirement age, and projected disability, family, survivor and Medicare benefits under various circumstances. It would have been very fine and comforting except for the first page.
“About Social Security’s future,” Jo Anne explained. Social Security is “a compact between generations.” I have been paying for older, retired and disabled Americans’ benefits. But she warns “the Social Security system is facing serious future financial problems, and action is needed soon to make sure that the system is sound when today’s younger workers are ready for retirements… Unless action is taken soon to strengthen Social Security, in just 15 years we will begin paying more in benefits than we collect in taxes. Without changes, by 2042 the Social Security Trust Fund will be exhausted… At that point, there will be enough money to pay only about 73 cents for each dollar of scheduled benefits.”
Those who keep their reports from year to year probably know that the names have changed and the fund exhaustion point has moved a bit, but the same verbiage has appeared in every annual report for a long, long time. Why is Social Security in trouble, and what can “save” the program that has benefited so many for three generations?
Each year around April Fool’s Day (it used to be exactly that day, but recently they’ve been moving it up a few days) the Trustees of the system report on the financial and actuarial numbers underlying the benefits. When I began studying the system’s finances over a decade ago, one had to order a copy of the massive report, usually through the local congressman’s office. Now the Trustees report is readily available through their website, www.ssa.gov. If one knows where to look in the document, determining the woes of Social Security is pretty easy.
How the System Works
First we should review how the system works. Every generation of workers pays a bit over 6% of income, with a match by employers, to the system. They turn right around and pay out nearly all of it to retired and-disabled workers and their families. Nearly all, but not all. The surplus is invested. It’s invested in IOUs to the U.S. Government, which then spends the cash on government projects and jobs and missiles and foreign aid and all the other things Congress funds.
At the end of 2003, the combined retirement and disability trust funds contained $1.5 trillion dollars. That represents the claims to be made in the future by retirees and disabled workers on the income taxes of those who are working in the future. When there is no more surplus contribution to Social Security, those government bonds will have to be cashed in, and more income tax will have to be collected. That will begin happening shortly after the Boomer generation begins to retire in 2011, barely seven years from now.
Then the retirement trust fund itself will run out of money sometime between 2030 and 2045. At that point, barring some big change in payments (down) or revenues (more taxes), the whole system will collapse.
Can the system be saved? The Trustees admit (in lots of words) that falling populations are creating the problem. Fertility rates, now hovering about 2.0 children per woman, are the culprit. The system was in actuarial balance “forever” when the fertility rate was about 3.6 children per woman. But the fertility rate, because of abortion and contraception, collapsed in the 1960s and 1970s, as the graph shows.
Social Security’s “low cost” assumptions, which delay the collapse of the trust fund indefinitely, “save” the system by assuming that fertility increases by 10%, to 2.2 children per woman, and does that immediately. Another major assumption they make is that immigration increases to 1.3 million per year. That is a nearly 40% increase over their intermediate assumptions.
That means that Social Security is assuming that higher birthrates and immigration law changes will bring about a huge increase in taxpayers to save the system from bankruptcy. It remains to be seen whether American voters will bring in workers from other countries or increase their own birthrates in sufficient numbers. Neither appears probable at the moment. The Trustees, despairing of a real increase in fertility, are simply fiddling in the demographic darkness while the system burns slowly to the ground.
Pat Cunningham is principal of Central Catholic High School in San Antonio. He has been an adjunct instructor in finance at the University of Texas at San Antonio, and in business ethics at the University of the Incarnate Word.
