The Trustees for Social Security and Medicare released their annual report for 2020 yesterday. The key take-away from the latest report is: there are no take-aways.
In the 2020 Trustees’ Report, the author’s most significant conclusion was: the potential impact of the COVID-19 pandemic on these programs is unclear. Given the uncertainty created by 20 million unemployed workers, the forecast provides insight and analysis of a future where COVID-19 doesn’t exist. This to me is not much different than sportswriters gathering to ponder the scores and stars of a NCAA March Madness campaign that was never played. Welcome to April madness.
As you might guess, I don’t see much point in using the resources of the Social Security Administration to create the report based on an alternate universe. In this case, the material tells us less about what will happen with these programs and more about what might have happened in a growing economy. That said, the report concludes that the program would likely have once again finished in the black over 2020 with a timeline for the exhaustion of the trust fund in-line with last year’s report – provided that the economy was teeming with jobs and pay raises.
While the commentary in the report is based on speculative data, the results aren’t entirely polly-anna. Even without any COVID-19 impact, the report shows a breath-taking jump in the gap between expected revenue and expected cost.
- The revenue shortfall for OASDI jumped from $13.9 trillion a year ago to $16.8 trillion
A $2.9 trillion increase in empty promises has to be a record. The program only generated a little more than $1 trillion in revenue of all forms.
In other words, we could have reduced benefits to zero in 2019 and the program would have continued to deteriorate. Mind you, these results assume an economy teeming with jobs and wages.
The chief culprit was the tax-cuts, not the Tax Reform heralded by Trump-critics. The repeal of the ACA’s “Cadillac” tax cost the program about $700B in solvency – (see more.)
Separately, the passage of time, what I call the cost of doing nothing, took another chunk out of the program’s prospects – (see more.)
These negative forces were somewhat offset by an improving outlook on disability claims. The Trustees note that claims have fallen since 2010 as the economy improves.
If the economy continued to improve, the numbers would fall further. Of course we don’t have an improving economy; we have an economy that looks a lot like 2010.
The highlights included some perspective on the cost savings related to benefit cuts.
- “<benefits would be reduced today> about 23 percent if the reductions were applied only to those who become initially eligible for benefits in 2020 or later….
- “a reduction in scheduled benefits by an amount equivalent to a permanent 25 percent reduction in all benefits starting in 2035 <applied to all beneficiaries>”
This comparison tells us a lot about the failure to build consensus on Social Security reform.
In order to protect existing retirees from the consequences of poor politics, Congress would have to hit someone who is 61 with a reduction today that isn’t much different from the one he might absorb in 2035, so lawmakers would have to convince a 61 year old to accept a benefit cut today that he doesn’t want to get in 15 years.
Analysis from the Bipartisan Policy Center suggests that the decline will push Social Security into insolvency in 2029.
Alicia H. Munnell, the director of the Center for Retirement Research at Boston College believes that the trust fund could be wiped out by 2033.
The next round of clarity will likely come from the Congressional Budget Office which tends to be much more pessimistic about Social Security than most.
We have no idea when the exhaustion of the trust fund might force the Social Security Administration to reduce payment levels to beneficiaries. We do not know what size the reduction might be. Worse, we have no idea how any shortfall in revenue will be distributed to existing beneficiaries.
The one thing that is abundantly clear is most people in Washington aren’t terribly worried.