This past week, the trustees of the Social Security Trust Funds released their report on the program’s status, revealing yet another bread crumb on the trail to insolvency.
At a high level, the report shows that the program should be able to pay scheduled benefits for roughly 16 years. While that may sound like a long-time, it is about the life expectancy of someone turning 71 today. At that time, the trustees would have to allocate 23% reductions in payments, but no one knows how that allocation would affect individual retirees.
Best Results in Years
On the surface, the report showed the best year over year results in my memory.
This news also came as a pleasant surprise to many of the pundits who were watching the results. The typically dour Washington Post editorial department declared, “There’s actually some good news about Social Security.” The L.A. Times reported, “Surprise! Social Security has gotten healthier.”
The Improvement Was In The DI System
If you dig a little deeper, the old-age retirement side of the system worsened a bit, and that decline was more than offset by improvements on the disability side of the system.
Generally, most people look at the system as a whole because when one pocket has gotten in trouble, in the past Congress has quickly reached into the other to compensate. Most recently, Congress adjusted the allocation of payroll taxes to ensure that disability didn’t skid into insolvency.
While I do not follow the disability system, it showed very strong results, largely contradicting the meme that the Trump Administration is bankrupting the program. Fewer people are claiming benefits given the current job market. That strength added 20 years to the program’s solvency point. It was enough to offset all of the deterioration in the retirement system.
So you are likely asking, “Why are wait times for hearings rising if the volume of applicants is falling so fast?” (I don’t know. I do not follow the DI system.)
Here is the key quote:
If the assumptions, methods, starting values, and the law had all remained unchanged, the actuarial deficit would have increased to 2.90 percent of taxable payroll, and the unfunded obligation would have risen to about 2.74 percent of taxable payroll and $13.7 trillion in present value due to the change in the valuation date.
Policy experts measure the health of the system by comparing the size of the problem over 75 years (X) to the taxable wage base over that period of time (Y). If the ratio is falling, as it did over the course of 2018, the system’s health is improving. In this case, X is rising, thus our ability to deal with the crisis is growing faster than the problem.
In other words, the report did not say that Social Security grew healthier over the course of the year. It said that employers will be more generous in the coming 75 years than we thought a year ago. Thus, much of this improvement is connected to the efficacy of the Affordable Care Act.
Rightly or wrongly, the trustees believe that the savings created by that legislation will be passed to the employees as higher wages: “Because these premiums are not subject to the payroll tax, slower growth in these premiums means that a larger share of employee compensation will be in the form of wages that are subject to the payroll tax.”, see page 75 of the 2019 Trustees report.
Keep in mind, high revenue estimates aren’t new.
If we look back to the end of 2010, the trustees had high expectations for revenue growth driven primarily by the expected impact of the Affordable Care Act on wages. As we fast forward in time, very little of the expected revenue materialized. In 2011, we had a healthy and growing interest income. Of course, that revenue didn’t materialize either.
| Year End | Average Projected Rev Growth | Projected Average Wage | Actual Average Revenue Growth | Actual Average Wage Growth |
|---|---|---|---|---|
| 10 Year Projections 8 years ago | 5.47% | 4.18% | 3.2% | 2.76% |
| 10 Year Projection 2019 Trustees Rpt | 4.82% | 4.95% | ? | ? |
According to the Committee for a Responsible Federal Budget, revenue isn’t the only estimate from the trustees report that may be ambitious.
I Was Wrong In The Past – See Comments
So I am staring at the revenue growth in payroll taxes in the coming year, (+6.44%), wondering where it is coming from.
In the report, the inflation rate remains low; unemployment is expected to rise; and GDP growth is contained. It is possible, and the experts with whom I trade emails assure me that the numbers are plausible.
Why Estimated Wages Is Important
You may be thinking: Thanks Captain Obvious. But “estimated” revenue is more important than you think.
As mentioned above, the stability of the system is measured by the size of the problem (unfunded obligations) as compared to our resources (future taxable payroll.) As estimated wages rise, the problem not only appears smaller, but our ability to deal with looks larger.
Happy If I Am Wrong
There is another plus to rising average wages. My benefits are indexed to wages. If we hit these estimates it will be very good for me. My past earnings rise in the calculation by 6.44%. So folks, let’s all hope that these numbers are right.
