A slow-moving crisis is approaching for Social Security, threatening to undermine a central pillar in the retirement of tens of millions of Americans.
Next year, for the first time since 1982, the program must start drawing down its assets in order to pay retirees all of the benefits they have been promised, according to the latest government projections.
Unless a political solution is reached, Social Security’s trust funds are expected to be depleted within about 15 years. Then, something that has been unimaginable for decades would be required under current law: Benefit checks for retirees would be cut by about 20% across the board.
“Old people not getting the Social Security checks they have been promised? That has been unthinkable in America — and I don’t think it will really happen in the end this time, because it’s just too horrible,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “But action has to be taken to prevent it.”
While the issue is certain to be politically contentious, it is barely being talked about in Washington and at 2020 campaign events. The last time Social Security faced a crisis of this kind, in the early 1980s, a high-level bipartisan effort was needed to keep retirees’ checks whole. Since that episode, the program has often been called “the third rail of American politics” — an entitlement too dangerous to touch — and it’s possible that another compromise could be reached in the current era.
Benefit cuts would be devastating for about half of retired Americans, who rely on Social Security for most of their retirement income. A survey released in May by the Federal Reserve found that a quarter of working Americans had saved nothing for retirement.
The shrinking of Social Security’s assets expected in 2020 would mark a significant change in the program’s cash flow, one that could complicate Americans’ retirement planning — even for the many relatively affluent citizens for whom Social Security is still a major source of income in old age.
“Fifteen years is really just around the corner for people planning their retirements,” said John B. Shoven, a Stanford economist who is also affiliated with the Hoover Institution and the National Bureau of Economic Research.
“The cuts that are being projected would be terrible for a lot of people,” he said. “This needn’t happen and it shouldn’t happen, but we’ve known about these problems for a long time and they haven’t been solved. They’re getting closer.”
Social Security has a long-known basic math problem: more money will be going out than coming in. Roughly 10,000 baby boomers are retiring each day, with insufficient numbers of younger people entering the workforce to pay into the system and support them.
And life expectancy is increasing. By 2035, Social Security estimates, the number of Americans 65 or older will increase to more than 79 million, from about 49 million now. If the program has not been repaired, they will encounter a much poorer Social Security than the one seniors rely on today.
How Social Security Cuts Would Affect a Typical Person
Under current law, cuts would start in 2034, when the main trust fund is expected to be depleted, or in 2035, if Congress authorizes Social Security to pay old-age benefits through the Disability Insurance Trust Fund.
Consider a woman with average annual earnings of $51,795 (in current dollars) over the course of her career, who retires at age 67 in 2037. The latest Social Security study indicates that she will be entitled to $27,366 in inflation-adjusted benefits. But if the trust fund shortfall has not been remedied, Social Security would be permitted to pay her only $21,669 — a 21% cut.
The reductions of roughly 20% on average are just a starting point. If current laws are unchanged and current economic projections remain intact, the cuts would rise to 25% in later years, a New York Times analysis of Social Security data indicates.
Unless Congress and the White House reach an agreement before the trust funds are emptied, most Americans will face hard choices: delaying retirement and working longer if they can, or simply surviving on less.
The ‘Third Rail’
Cutting the Social Security checks of people in retirement is, to say the least, politically dangerous.
David Stockman, President Ronald Reagan’s budget director, tried to do just that in 1981. What happened in that episode gives some clues for a possible solution today.
Like other conservatives of that era, Stockman viewed Social Security as a form of “closet socialism” that needed to be scaled back. With the program facing a solvency crisis, he proposed immediate reductions in retirees’ benefits.
Older Americans rebelled, and members of Congress listened to them. “I just hadn’t thought through the impact of making it effective immediately,” Stockman observed ruefully in his 1986 book, “The Triumph of Politics: Why the Reagan Revolution Failed.”
A nimble politician, Reagan rejected Stockman’s recommendations and formed a bipartisan commission to study the issue. Ultimately, Reagan reached a long-term agreement with the Democratic speaker of the House, Thomas P. O’Neill Jr., who viewed the preservation of Social Security as essential.
While they made no immediate cuts in Social Security checks, they reduced benefits in more subtle ways, using measures that are still being used, like gradually delaying the standard retirement age from 65 to 66, where it stands today, and eventually to 67.
Taxes increased, too — bolstering cash flows and creating the trust fund surpluses that have given retirees and current politicians some breathing room.
But in ways large and small, the Reagan-O’Neill Social Security fix is coming undone. Notably, the hefty balances in those trust fund accounts today — some $2.9 trillion — may be having an unintended consequence.
“The trust fund surpluses were intended to provide a buffer that would give politicians enough time to show some fiscal responsibility,” said Robert D. Reischauer, a former Social Security trustee who was also head of the Congressional Budget Office and is now president emeritus of the Urban Institute. “But the problem is that without an immediate crisis, the politicians don’t have to act. And really, they would rather sleep. So when the crisis eventually comes, as it will, it is likely to be much, much worse because of the delay.”
John Cogan, a professor of public policy at Stanford University, said Social Security’s fundamental problem was that benefits had been rising faster than revenue. Cuts, he said, will be unpalatable but inevitable.
“The solution, I think, is to slow the growth in real benefits promised to future recipients,” he said.
Democrats in Congress have suggested an increase in Social Security benefits, accompanied by higher taxes for the wealthy. In combination, the bill’s various measures would eliminate the program’s financial shortfall, according to projections by Stephen C. Goss, the chief actuary of Social Security.
Conservatives continue to push for sharp reductions in the size of Social Security as well as Medicare, saying the United States can’t afford the growing burden of the two “entitlement programs.”
Reischauer fears that, given the current acrimony of American politics, there will be no compromise until the last minute.
“We will need a combination of increased taxes and reduced benefits, undoubtedly,” he said. “But if we wait, the deficits will only grow and the eventual solution will be much more painful.”