This Social Security Prediction Will Be Proved Wrong in 2019
Sean Williams, The Motley Fool
Updated
It's that time again, folks. Last week, the Social Security Board of Trustees released its latest annual checkup on America's most important social program. Currently divvying out benefits to 63 million people a month, 70% of which are seniors, the Trustees found that Social Security is indeed in trouble, as has been advertised for decades.
To some small extent, the latest report brought with it a modest reprieve. According to the Board of Trustees, Social Security is no longer expected to exhaust its asset reserves -- i.e., the aggregate amount of net cash surpluses since inception of the program -- by 2034, as called for in the 2015 through 2018 reports. Rather, the forecast now expects Social Security's almost $2.9 trillion in asset reserves to run out by 2035, at which point an across-the-board benefits cut of up to 20% may need to be passed along to then-current and future beneficiaries.
Two Social Security cards partially covering a hundred dollar bill.
Image source: Getty Images.
However, even though this forecast reduction is ever-so-slightly lower than the 21% reduction predicted in 2018, and the 23% cut forecast in 2017, it's still not much solace when more than three out of five seniors rely on Social Security for at least half of their monthly income.
Providing more color to the report, the trustees also announced that Social Security brought in a net cash surplus of $3.1 billion in 2018. This was a surprise, since a net cash outflow of $1.7 billion was forecast in the 2018 report. Further, the new report calls for another surplus in 2019 of $1 billion, before finally giving way to an unwelcome inflection point in 2020, when more money is spent by Social Security than is collected.
This aspect of the Social Security forecast is all wet
Understandably, the short-term (10-year) and long-term (75-year) projections from the trustees are exactly as advertised: estimates. As the event horizon nears, the accuracy of the predictions should improve. But there's one near-term projection from the trustees that I'm relatively convinced will be proved wrong in 2019: You won't have to wait until 2020 for Social Security to spend more than it collects for the first time since 1982. My take is it's going to happen this year.
The first factor to consider is that the Board of Trustees changes its mind a lot when it comes the longer-term outlook of the program. Since 1985, the asset reserve depletion date, which has varied from being 15 years to 65 years down the road, has been adjusted up or down 23 times. This drives home the point that what the trustees present each year are their best estimates, given the data they have available, and not concrete truths.
A man placing crisp hundred dollar bills into two outstretched hands.
Image source: Getty Images.
Secondly, consider that the trustees' report in 2018 was wrong, thereby proving the fallibility of the smart minds behind the report. As noted, last year's report called for a net cash outflow of $1.7 billion from the program. But what transpired, mostly thanks to strong economic growth, was an increase in asset reserves of about $3.1 billion. With only $1 billion in surplus forecast in 2019, it presumably wouldn't be difficult for this figure to dive into the negative.
But the most damning data of all comes courtesy of the Social Security Administration, which publishes its investment holdings (bonds and certificates of indebtedness) on a monthly basis. Between the end of 2018 and the end of March 2019, Social Security's asset reserves have declined by $9 billion, with the majority of this decline coming from the Old-Age and Survivors Trust (i.e., the Trust that pays retired workers and survivors). Even with U.S. first-quarter GDP growing at 3.2%, based on initial estimates, the strongest first-quarter growth in years still hasn't been enough to halt a notable net cash outflow from Social Security. This leads me to believe that sustained GDP growth of 3.5%, or higher, would be needed to grow payroll tax revenue at a sufficient enough rate to overcome the recent rise in program expenditures. I'm not counting on GDP growth to be this strong in 2019.
In short, Social Security's unwanted inflection point looks to already be here.
Inflection point aside, here's the bigger issue
However, even if I'm right and the trustees are wrong, it doesn't make much of a difference when examining the long-term outlook for the program. Between 2035 and 2093 there exists a funding shortfall of $13.9 trillion, which has risen by $700 billion in two consecutive years. Essentially, the longer Congress waits to act on fixing Social Security, the costlier that eventual fix is becoming.
A blue Democrat donkey and red Republican elephant butting heads.
Image source: Getty Images.
Why haven't lawmakers shored up the program? A big part of the answer is that Democrats and Republicans can't agree on much of anything when it comes to fixing Social Security.
Democrats favor fixing the $13.9 trillion estimated shortfall through 2093 by increasing revenue. This would be done by lifting or eliminating the earnings cap associated with the payroll tax, which stood at $132,900 in 2019. In 2016, an estimated $1.2 trillion in earned income was exempted from the payroll tax. But Republicans have made it very clear that they won't support a tax increase on the well-to-do, who are already paying their share into Social Security.
Meanwhile, Republicans have proposed a gradual increase to the full retirement age from a current peak of 67 for those born in or after 1960, to as high as age 70. Doing so would counteract increasing longevity over many decades and reduce program outlays. But Democrats refuse to support this plan, since it would lead to lower lifetime benefits collected by future generations of Americans.
The fact is that a bipartisan fix works best. Yet, reality is that it's unclear when lawmakers in Washington D.C., are going to realize this.
