This statement by the Trustees is easily the most misunderstood in the entire Social Security debate. The media has misread what the Trustees have said, and then place their translation well out of context. Readers and bloggers subsequently surround that misconception with words like guarantee which do not even appear in the original text.
This statement is part of a much larger report which is a cautionary tome. The Trustees are providing this guidance to the public as a reasoned warning. “This year’s Trustees Report contains troubling, but not unexpected, projections about Social Security’s finances. It once again emphasizes that Congress needs to act to ensure the long-term solvency of this important program.” They are warning people who are as old as 63 that they can expect to be affected by the problem in the system.
In contrast, some pundits have taken the guidance out of the cautionary context, and replace it in an upbeat tale of success. Paul Krugman has reframed this warning as “It’s also worth noting that even if the trust fund is exhausted and no other financing provided, Social Security will be able to pay about three-quarters of scheduled benefits”. The guidance is transformed from a caution to a measure of success.
What does the Trustees statement really mean? Once the Trust Funds are exhausted, benefits cannot exceed the inflow of the system. Since inflows will vary from week to week and month to month, one has to assume that benefits will likewise vary. One week you may receive 80% of your scheduled benefits, and 70% a different week. In the statement, the Trustees project that Social Security will distribute to all recipients on average 75% of scheduled benefits over the course of a year.
This statement does not mean that an individual’s benefit check will be reduced by 25%. What the system can pay in aggregate is completely unrelated to what you can expect to receive as an individual. There is no law which allocates the reduction caused by insufficient payroll tax collections. According to IBD, public trustee Charles Blahous has said that low-income and elderly beneficiaries would have to be protected from cuts, meaning the possibility of a bigger impact on others . If so, your check might be 100% or 50% of your scheduled benefits.
2033 is not a hard date nor is 75% of scheduled benefits a hard number. These are projections which the Trustees have provided to demonstrate to Congress the seriousness of the problem. Both of these numbers are estimates based on assumptions which may or may not materialize. In fact, the Trustees have provides scenarios in which the Trust Fund is exhausted as early as 2027 . The exhaustion date has changed over the past few years as previous assumptions have proven overly optimistic. 2033 assumes a good economy. If the economy is less than good, Social Security will run out of resources sooner.
One of the assumptions that enable Social Security to meet 73% of its obligations in 2086 is that workers will continue to pay 10.6% of wages in payroll taxes for retirement benefits . This assumption is optimistic. Social Security isn’t just retirement insurance. It also provides parental support costs. Once the Trust Fund is exhausted, workers will be faced with a system that doesn’t provide the same level of insurance at a time when they are paying more to support their parents. So the Trustees are assuming that the working generation will pay the same price for a system which delivers less at a time when disposable income is going down. There is virtually no economic model that explains that assumption.
Workers today enjoy a holiday from payroll taxes. It started in 2011, and was continued in 2012. The problem with ending this holiday is that politicians have an exceedingly difficult time explaining to 160 million voters why their payroll taxes should return to the former levels. If you can’t explain increasing taxes today, imagine trying to explain maintaining payroll taxes to someone who is losing not only personal benefits, but paying incremental support for their parents because the system has failed.
In the net, the Trustees do not know when the system will lose the capacity to pay full benefits nor can it tell you how much you will receive once the Trust Fund is exhausted. You cannot plan when your benefits will be reduced or by how much. The guidance is a warning about the problem in the system, not a testament to its success.