Social Security's problems not insurmountableNews added by Benefits Pro on April 26, 2012
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By Paula Aven Gladych

The 2012 Trustees Report showed that Social Security’s deficit increased from 2.22 percent to 2.67 percent of taxable payroll and that funds would be exhausted by 2033 instead of the projected 2036. But, according to the Center for Retirement Research at Boston College, both of those numbers can be overcome over the next 75 years.

Once the trust fund is exhausted, “some commentators describe Social Security as ‘bankrupt,’ leaving the impression that the program has no money at all. But payroll tax revenues continue rolling in. So the system will still have enough revenue to pay 75 percent of currently legislated benefits after exhaustion of reserves in 2033,” the report said.

Relying on current tax revenues means that in 2033 the replacement rate—benefits relative to pre-retirement earnings—for the typical worker would drop from 36 percent to 27 percent.

The Center found that since Social Security’s projected deficit is 2.67 percent of covered payroll earnings, all that needs to happen is for payroll taxes to be raised by 2.67 percentage points—1.34 percentage points each for the employee and employer—the government would be able to pay the current package of benefits for everyone who reaches retirement age at least through 2086.

Additional changes would have to be made to make it a lasting fix. The report found that, “lasting solvency would require a pay-as-you-go system with substantially higher payroll tax rates/lower benefits or the buildup of a trust fund larger than that required for 75-year solvency, the returns from which could cover some of the costs.”

Congress needs to figure out what to do with the impending exhaustion of the Disability Insurance program and the expiration of the 2-percentage-point reduction in the employee’s payroll tax in December 2012, the report found.

The recession and an increase in the disability rates of younger people have helped exhaust the Disability Insurance portion of the Social Security trust fund, the report found. That means that the DI piece is expected to be depleted by 2016 unless something is done to stem the tide.

The Middle Class Tax Relief and Job Creation Act of 2012 extended the temporary 2 percentage-point reduction in the Social Security payroll tax rate for employees and the self-employed through the end of 2012. The law states that the Treasury must make up for this reduction by reimbursing the trust funds with general revenue. The big question is whether Congress will let the tax reduction expire as planned.

The report concluded that, while “Social Security’s shortfall is manageable, it is also real. The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits. There is no silver bullet. Despite the political challenge, stabilizing the system’s finances should be a high priority to restore confidence in our ability to manage our fiscal policy and to assure work­ing Americans that they will receive the income they need in retirement.”

Originally published on BenefitsPro.com
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