Is Social Security broke or not?

Social Security Card iStockphoto

(MoneyWatch) COMMENTARY The 2012 Annual Report of the Board of Trustees of the Social Security program was released earlier this week, citing 2033 as the year the program's trust funds will run out for the retirement and disability income programs. This is three years earlier than the exhaustion date projected in last year's report.

I'm sure the report's release will unleash the usual rhetoric from both sides of the Social Security funding issue. The AARP took a refreshingly middle of the road approach:

"For the millions of Americans who have paid into Social Security and Medicare and are counting on their benefits, today's reports offer a clear assessment of the true status and long-term challenges facing these critical programs. The reports underscore the need for an open, national conversation focused on strengthening retirement security for today's seniors and future generations.

"The Social Security Trustees reaffirm that the program can pay full benefits until 2033, and roughly three-quarters of promised benefits beyond that time ...

"However, the Trustees also make clear that Social Security's long-term financial challenges must be addressed. While Social Security is not in crisis, it will require modest changes to ensure current and future generations will receive the benefits they've earned. The longer Washington waits to address these challenges, the more difficult it will become for workers who are trying to plan for their future."

Social Security: Trust fund in the red by 2033

I'm glad to see AARP state that changes need to be made to strengthen Social Security -- and sooner rather than later.

Both the AARP statement and the Trustees Report tell us that without any current changes to benefits or taxes, in the year 2033 and beyond, benefits would need to be reduced by 25 percent to be paid from taxes collected each year thereafter. I wouldn't exactly call a 25 percent benefit reduction in the year 2033 as "modest." Nevertheless, I believe the statements that Social Security can be sustained if we act today with modest benefit reductions and tax increases (yes, I said tax increases, not the squirrelly phrase "revenue enhancements").

According to the Trustees Report, Social Security could remain solvent by:

- Tax increases equal to 2.61 percent of covered payroll, or
-An immediate benefit reduction with a total value of 16.2 percent, or
- A combination of the two approaches.

This isn't good news, but it's not the end of the world either. And I would classify a combination of the above changes as "modest" if we just find the political will today to make these necessary changes.

Even if we make the above changes, we'll still have problems before 2033. In 2011, Social Security's income from taxes fell short of benefit payments and administrative costs by $148 billion; the projected shortfall for 2012 is $165 billion. A large reason for this shortfall is the temporary reduction in Social Security payroll taxes for 2011 and 2012. To make up this shortfall, Social Security will dip into interest earnings from the $2.7 trillion Social Security trust fund. However, interest payments from the trust fund are part of the total government deficit, which is projected to be $1.33 trillion in 2012.

This tells me a few things. First, we don't have spare change lying around to make up the ongoing shortfall in Social Security. If we were running an overall budget surplus, we wouldn't be as worried about this Social Security shortfall. But we're running large budget deficits, so we can't talk about Social Security without talking about the total federal deficit.

And second, we can't make much of a dent in the total federal deficit just with changes to Social Security alone. In 2012, the projected Social Security shortfall by itself represents about 12 percent of the total budget deficit. So we'll need to implement some pretty significant budget cutbacks and tax increases in other areas to reduce the federal deficit.

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If we adopted modest tax increases and benefit reductions, we'd still be in one of the best places to live on the planet. Let's stop whining about any amount of tax increases. Let's stop digging our heels in resistance to any reductions in Social Security benefits. Let's stop using inflammatory language, calling Social Security a "Ponzi scheme," that poisons the necessary discussions to make compromises.

We'll still have a great country if we need to pay more taxes, work a few more years until retirement, or if our benefits don't increase as fast as previously. We're a resilient nation, and we'll find a way to make ends meet in retirement with the changes that are necessary. But we've got to find a way to protect the most needy seniors while spreading the costs among everybody else. This will involve our political leaders making reasonable compromises, and putting our country's interests ahead of their political parties and ideologies.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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