Social Security: A Program in Trouble

By • July 3, 2012 0 Comments

The Social Security program is popular with Americans. It is also in trouble. What is the future of the Social Security program?

The financial problems of the Social Security program are likely to be important to federal employees who are under the FERS retirement program as they are paying into the Social Security program and this system is a major component of their income after they retire. Federal employees and retirees covered by the older CSRS retirement program did not pay into the Social Security system and do not receive Social Security payments as part of their regular federal retirement.

The House Ways and Means Committee is currently holding hearings on the future of the program and how to address its problems. Here are some of the current “challenges” facing this program as outlined by Congressman Johnson (R-TX) prior to the start of the hearing.

Financial Problems Facing the Social Security Program

According to this year’s report from the Social Security Board of Trustees, Social Security will be unable to pay as much to future retirees as these future retirees may be expecting to receive. And, according to experts on the program,  it isn’t just that Social Security’s current financing outlook is in trouble. It will also be increasingly difficult to protect current benefits if action is not taken soon to protect the system.

According to the Social Security trustees’ report, the Old Age and Survivor program will be unable to pay full benefits beginning in 2035, three years earlier than projected in the previous annual report. That means that workers who are 44 years old today will reach their full retirement age in 2035 at which point they and everyone else will face benefit cuts of 25 percent. In less than four years, Social Security’s Disability Insurance program will be unable to pay full benefits.

The average monthly benefit for a disabled worker today is $1,111. In 2016, revenues will cover 79 percent of benefits. This translates into a potential cut of about $233.

There is more bad financial news for the Social Security Disability Insurance program.

The number of American workers paying into the system increased about 70 percent between 1970 and 2011. The number of people receiving disability benefits has increased by more than 300 percent, from 2.6 million to over 10.4 million. By 2021, the number of beneficiaries is likely to be more than 12 million with total benefits paid of about $196 billion—a 52 percent increase over the $129 billion paid in benefits last year.

The cost of administering the program is also much higher now. The cost of running the program has gone up 68 percent in 10 years. Last year, administering disability programs cost about $7 billion, two-thirds of Social Security’s operating budget of $11.4 billion.

This isn’t the first time the program has faced major financial problems. It was facing major problems in the early 1980′s and the system was “reformed” in 1983. In that year, there was a significant payroll tax increase. With this new money flowing into the system, the Social Security program took in more money than it paid out for more than 25 years. Many Americans assume that this money was invested in marketable U.S. Treasury bonds in order to build up a large reserve of “good-as-gold” marketable bonds that could be resold to pay out benefits when the baby boomers retired.

How Will Benefits be Paid?

For those who are cynical about the ability of government to manage its resources wisely, it is not a surprise to learn that the money already paid for future benefits was not saved and was not invested in marketable securities. If it had been invested, the interest on top of the dollars paid into this program would have been more than enough to pay out future benefits. But, instead of securities that can be sold so the money can be paid out, there are pieces of paper (IOU’s) that state, in effect, that the government has spent the money and promises to pay it back when the benefits need to be paid out. In other words, the government intends to use its power to levy taxes to obtain new money from which benefits will be paid.

The money from the payroll tax has been spent to finance other government programs and operating expenses. There are now about 10,000 baby boomers retiring each day. Much of the money to pay benefits will have to be borrowed and the federal deficit will increase as there is no longer enough money coming in each year to pay current benefits.

Those who are expecting to receive payment from the Social Security program to pay their expenses in retirement are relying on the government to find a way to pay with dollars that have enough value after inflation to provide retirees with a comfortable retirement.

For some federal employees who are now considering retirement, one question to be answered is when to apply for your Social Security benefits. FedSmith contributor John Grobe has considered this question in his article When Should You Apply for Social Security? and it is worth reading if you are now eligible to receive Social Security benefits. Keep in mind there is an “earnings test” for Social Security recipients who are under the full retirement age and the amount of money you receive from a Social Security payment will be reduced if you make “too much money.”

The government has a number of options. It can cut benefits or it can raise taxes or alter the program in some way to take in more money to pay out benefits. Chances are, nothing will happen in 2012 as it is an election year and there are not that many in Congress willing to take a position that will be controversial shortly before an election. (See What Will Happen to Social Security?)

 

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About the Author (  |   )

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletter and a co-founder of two companies and several newsletters concerning federal human resources.

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