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Decoding the Future for Social Security

Friday July 28th, 2017   •   Posted by Craig Eyermann at 5:47am PDT   •  

Social Security’s Trustees have released their annual report for 2017, which updates their view of the fiscal health of the single largest government program in the United States. To provide some sense of scale, the program paid out $922 billion to 61 million Americans in 2016, for an average benefit of over $15,000 per recipient, mostly in the form of its pension or retirement benefits.

As part of that report, the Trustees published the following chart that shows what their expectations are for the future of the U.S. government’s ability to make good on the promises of U.S. politicians to provide a stable income for America’s senior citizens after they retire from working.

Since there’s a lot of information packed into this one chart, let’s unpack it to get a better sense of what the Trustees are telling Americans today.

Let’s start on the left hand side of the chart. The vertical scale represents the percentage of wage and salary income that is subject to Social Security’s payroll tax, which is currently set at 12.4% and which for most Americans equally split between employees and employers (self-employed Americans pay the whole amount).

The thin black line represents the revenue that Social Security collects each year from the program’s payroll tax as a percentage of taxable income, both historically for the years from 2000 through 2016 and also what the Trustees project for the years from the current year of 2017 through 2095. Both historic data and future projections show that this line is flat.

The heavy black line represents the “promised” amount of Social Security benefits that the U.S. government will pay under current law, which really represents Social Security’s expenditures as a percentage of Americans’ wage and salary incomes that are subject to Social Security’s payroll tax, which are really the cost of all the pension, survivors and disability benefits that it pays out each year. We see that in the years from 2000 to 2009, those costs were less than the amount of money that Social Security collected in taxes, but beginning in 2010, Social Security began spending more money that it collects in taxes each year. That situation has persisted through 2016, as the program’s fiscal situation has deteriorated.

Looking forward from 2017 onward, we see that the amount of money that Social Security pays out in benefits grows to greatly exceed the amount of money that it collects through its payroll tax, which continues for 16 years through 2033. Social Security is able to do this because of the large amount of money that it has been accumulating in its trust funds for Old Age and Survivors Insurance (OASI) and Disability Insurance (DI) since 1982. (The combined trust funds are abbreviated as OASDI).

But in 2034, that ability comes to a crashing halt, because Social Security’s Trustees believe that the program’s trust funds will have been drained dry by that year. From that point on, Social Security can only pay out benefits from the money it takes from the paychecks of working Americans, which we see in the chart as the heavy black line and the thin black line laying on top of each other. When that happens, one of two things will happen that will negatively impact millions of Americans:

  1. Americans who receive Social Security benefits will have their payments suddenly reduced by 23% below the amount that today’s formula that determines the amount for paying individual Social Security benefits says they would be, if only the U.S. government had the money to pay them. That situation will slowly grow worse as time passes, where by 2091, the gap between the “scheduled” payments and the available money to pay them from payroll tax collections will grow to 27%.
  2. If U.S. politicians choose to act to keep Social Security benefits from ever being cut by hiking Social Security’s tax rate, they will need to jack up Social Security’s payroll tax rate to 18%, taking a massive additional chunk out of the paychecks of all working Americans.

And that’s it. One chart tells the entire story of what is becoming the near-term future of Social Security from the perspective of both taxpayers and beneficiaries, which you can now decode!

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July 2017