Social Security insolvency — and lower benefits — could arrive sooner than expected
Nearly $3 trillion that acts as a barrier against the cuts to Social Security benefits from insolvency could run out even sooner than previously expected.
The Old-Age and Survivors Insurance Trust Fund will begin sustaining annual deficits of more than $100 billion by next year — and vanish by 2031, according to a Sept. 2 report by the nonpartisan Congressional Budget Office.
Without any legislative fix, the depletion would automatically slash benefits for some retirees by 20% to 25%. In a projection earlier this year that didn’t include the economic impact of the coronavirus, the Social Security trustees had predicted cuts due to insolvency by 2035.
The coronavirus response will ramp up federal spending this year to 32% of U.S. gross domestic product — the highest percentage since World War II, the new CBO estimates for federal budgets over the next decade show. Record deficits affect Social Security.
“All major trust funds face depletion within the next 11 years,” according to the Committee for a Responsible Budget’s analysis of the CBO projections. “The structural imbalances faced by the Highway, Medicare, and Social Security programs have only worsened with the current crisis.”
Social Security retirement benefits would be cut by around a quarter in 2031, and today’s youngest retirees would receive 25% less when they turn 73, the bipartisan deficit hawk group says. Social Security disability outlays would fall by 11% upon depletion of its trust fund in 2026.
Declining tax revenue, lower interest rates, rising disability claims and more early retirements are driving the earlier projected depletion dates. In a different analysis of the coronavirus impact from April, another bipartisan group predicted Social Security would reach insolvency by 2028.
A hike of $52 billion, or 5%, in Social Security outlays this year represents only one small part of an increase of $1.9 trillion, or 70%, in mandatory spending, the CBO says. Most of the soaring spending stems from coronavirus relief such as small business loans and unemployment benefits.
Due to longer term demographic and economic trends, Social Security expenditures have surged above noninterest income in the program and they’re growing two times as fast. By 2030, the trust fund will have an annual deficit of $384 billion and a balance of only $533 billion.
Experts from all political persuasions agree that the spending for coronavirus relief is necessary, but they say that federal policymakers must act in the aftermath to avoid Social Security insolvency and lower benefits for future retirees.
“Today’s borrowing is largely appropriate and necessary in order to reduce and distribute over time the economic pain caused by the COVID-19 pandemic,” according to the Committee for a Responsible Budget. “But CBO’s newest figures show that our long-term course is unsustainable, and much worse than before.”
The most popular budgetary ideas for higher taxes, reduced benefits or a combination of the two remain much the same as they have for a decade or more. Raising the retirement age in line with longer life expectancy or increasing payroll taxes for high-income earners are just two.
Voters may well decide this fall what, if anything, will be done. President Trump has pledged to protect Social Security. He has also proposed giving workers higher pay by “terminating the payroll tax” that is the main funding source for Social Security. Former Vice President Joe Biden has called for applying the tax on wages above $400,000, in addition to the current tax on the first $137,700.