This article was a speculation in front of the release of the Trustees report. Last year, the revenue forecast for the program was high, and it continues to be. The 2019 estimate for revenue growth is 5.7%. That is a big jump over recent history. If it is a problem, it will appear in the 2020 report.
The Social Security Administration announced this week that it will be releasing the 2019 Trustee Report for the Social Security Trust Funds in the coming days. Long story short: watch the revenue. Update: The report has been released as of Monday, April 22, 2019.
As in years past, most people expect that the report will show that the program faces increasing shortfalls and enjoys fewer years solvency. This result isn’t a surprise, so what might make this year’s edition more interesting?
2019 is a non-election year, giving the public more than a year to digest any adjustments in the forecast before going to the voting booth. So, if there is any bad news, now is the time to put it into the report.
The downtrend isn’t news
As in the past, the biggest challenge facing Social Security is the passage of time, which is the equivalent of programmatic cancer. In the new report, the system will create another $500 to $600 billion in unfunded liabilities simply because we have adjusted the date on the cover of the report.
That isn’t bad news. It isn’t even news. It is a well-documented trend, acknowledged by virtually every expert on the program: the longer we wait to deal with the issue the harder the solution will be on retirees.
Sort of bad news
Bad news might take shape in terms of things like the number of babies born 20 years from now. While that change is unfavorable, it is only sort of bad news because it really does not move the date of insolvency. A baby born today will not be able to drive a car by the time that benefits are put at risk.
Worse bad news
Really bad news might take shape in the form of revenue projections. While the program hit the revenue target for 2018, the projected growth was roughly 1%. Over the past seven years, revenue has grown at a rate of 3.2%. Over the next ten years, total programmatic revenue (including the disability system) is expected to grow at roughly 5% without a recession in sight.
If the trustees lower the projected income of the program, every dollar of revenue reduction comes from the projected trust fund reserve. So keep in mind, there is nothing that stops the Trustees from looking at the current figures and deciding that is a bit too aggressive. Say the trustees lower the growth to 4.5 – not shabby growth – and the trust fund projections will fall by $400 billion. That is bad news.
Even worse bad news
The news can get worse because not all dollars are equal.
We measure Social Security’s shortfall in terms of wages over the next 75 years. Last year, for example, the pundits emphasized that the shortfall represents 2.84% of future taxable wages, up from 2.83% from the 2017 report. Wow, that is great! The slight uptick meant that Social Security was largely stable year over year.
What might put that stability in question?
The really bad news that might come out in the current report is we expect lower revenue because our wage growth expectations have been too aggressive. That is a YIKES possibility because it moves the metrics in two different paths of pain. Understand, the “2.84%” is X (the shortfall) divided by Y (the present value of future wages). The worse case means the X is rising while the Y is falling. In that case, the metric by which we measure the system’s stability to move by more than an uptick.
How bad can bad be?
In 2017, the trustees expected payroll taxes plus interest to pay for the expenses of the program for 5 years. One year later, the trustees had changed assumptions, and the 5-year cushion evaporated in 1.
These forecasts are not an exact science, and there is no guarantee that Social Security will be able to pay full benefits in 2033, much less 2034. If that date moves by 3 or 4 years, voters are apt to pay attention.
I was wrong before
I wrote roughly the same analysis in 2017 as the Trump Administration took office. I was fairly confident that the new players would want to shift as much blame onto the old players as possible in part because I tend to look for the worst in politicians. Why? Because that is what I would do.
I was wrong, however. In 2017, the trustees, who are all appointees of the current Administration, increased near-term revenue expectations even higher.
In 2018, they paid the price for optimism. Revenue missed the overly-aggressive projections, and President Trump was blamed (see, Social Security and Medicare trustees confirm: GOP policies have hurt both programs.)
The Sky Is Falling
The point here isn’t to say that the sky is falling, but you should look at what happens to the revenue estimates in the next 10 years. As we get closer to the point of insolvency, the projected date will become more responsive to changes in estimates.
Frankly, I don’t think revenue will jump 6% in 2019, and that is a question that politicians would rather face today than in 2020.