A reality check on Social Security’s long-term financing

March 15, 2012 | Alex Stone

The U.S. Treasury recently published an interesting set of charts – 13 in all – about the state of the U.S. economy. The economic data underlying these charts – and the state of the 2012 economy – will likely determine who wins the White House in November, but let’s set aside short-term political implications for this post.

Instead, let’s focus on just one of the charts, titled “Drivers of Long-Term Deficits.” This chart projects the costs for Social Security, Medicare & Medicaid, and U.S. Discretionary spending (spending that is not considered “mandatory”), as a percentage of gross domestic product (GDP).

This graph is a reality check for those who have made rather dire predictions about the long-term financing of Social Security: Social Security costs will rise by less than 1% of GDP from now until 2037, when they will level off and begin to decline.

drivers of long term deficits social security and medicare medicaid

This slight increase in costs due to the retirement of the Baby Boomer generation was not unexpected – it was anticipated in 1983, when Social Security reform efforts established the Social Security Trust Fund to begin saving up for the expected increase. The Trust Fund is now checking in at around $2.7 trillion – every penny of it reserved for the retirement of baby Boomers – and more than enough to pay every Social Security benefit for the next 25 years.

Social Security is critical to the economic security of millions of retirees, disabled workers, and families of deceased workers – and far too important a program to dismantle based on political rhetoric. In fact, with one simple tweak to Social Security, we could strengthen benefits and ensure Social Security will be around for many more generations of Americans.

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Posted in Retirement Security, Social Security

Comments

  1. John: nice article.
    The Social Security Trust Fund consists mostly of special issue treasury bonds because the Federal government is structurally incapable of accumulating money. The long term problem with not only the social security trust fund but the rest of the 107 trust funds held by the government is the assumption that there will always be enough tax money to redeem any special issue bond in the future. Declining real wages and the demographic bulge toward increasing age make this assumption problematic. The US is not alone. This is already a problem in Japan and will be a significant problem in China in the next thirty years or so, according to a special report in ‘The Economist’ of a few months ago.
    Still, it’s good that you pointed out the tweaks needed to ensure the success of the program. The sooner the tweaks are made, the better.

  2. Gordon Glasgow says:

    Even if the Social Security cap was simply raised to $200,000, it would yield over 40% more revenue (source:IRS data).

    If one charts the revenue to Social Security vs. the unemployment rate, it is easy to see that the current reduction in the contributions to the trust fund are due simply to the number of people not working, and thus not contributing.

    Bring back real living-wage jobs, raise or eliminate the cap and the problem will solve itself.

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