Social Security options

In 2010, for the first time since the enactment of the Social Security Amendments of 1983, Social Security’s annual outlays will exceed its annual tax revenues, CBO projects. If the economy continues to recover from the recent recession, those tax revenues will again exceed outlays, but only for a few years. CBO anticipates that starting in 2016, if current laws remain in place, the program’s annual spending will regularly exceed its tax revenues, and beginning in 2039 the Social Security Administration will not be able to pay the benefits currently specified in law. If revenues were not increased by that point, benefits would need to be cut by about 20 percent to equalize outlays and revenues. (Director's Blog)

In light of this dire outlook, the Congressional Budget Office (CBO) presents policy options for Social Security in a recent study. CBO analyzes 30 options in five categories:

• Increases in the Social Security payroll tax
• Reductions in people’s initial benefits
• Increases in benefits for low earners
• Increases in the full retirement age, and
• Reductions in the cost-of-living adjustments that are applied to continuing benefits

Social Security Policy Options, July 2010
      Report (pdf, 67pp/1.8MB)
      Summary (pdf, 4pp/148kB)
      Director's Blog, July 1, 2010

SS "notch" for '47?

In a May brief the Center for Retirement Research at Boston College reports on lower Social Security benefits for new retirees born in 1947 compared to those born in 1930-1946. This is due to an "unintended quirk" in the benefit formula, and the paper urges congressional action for adjustment.

Since cost-of-living adjustments (COLA) were adopted in 1975, this is the first year of no COLA. The formula for granting COLA interacted with a spike in inflation in 2008, and those born in 1947 did not receive the 5.8 percent "windfall COLA" paid in Jan. 2009. The paper explains the term "notch" from the 1970s when beneficiaries born in 1917-1921 appeared to be at a disadvantage because of changes in SS benefit rules.

A New Social Security 'Notch'? Bad News for People Born in 1947, May 2010
      Brief (pdf, 8pp/203 kB)
      Introduction

Financing social security; bonds in retirement

"It's no secret that Social Security is facing a long-term financing shortfall" begins a recent paper by Alicia Munnel, Director of the Center for Retirement Research at Boston College, who discusses whether a portion of Social Security should be financed with the income tax, or general revenues. Munnel notes the two components of Social Security costs: the contributions that generate current benefits and contributions "to make up for paying benefits to early participants that far exceeded their contributions." It is the latter that needs shoring up. Her conclusion:

...the shift from the payroll tax to general revenues for the portion of the system’s financing associated with the start-up of the program would represent a more equitable sharing of the burden. At the same time, through the payroll tax workers would be paying an amount for their benefits equal to what they would have paid had a trust fund accumulated.

In another paper from the Center, research economist Anthony Webb argues that for retirement income security, households should seek return on capital over return of capital. He briefly discusses short-term deposits, long-term bonds, and Treasury Inflation-Protected Securities (TIPS). He states, "...the true risk-free asset is a portfolio of bonds and, in particular, inflation-protected bonds of appropriate maturities."


Should Social Security Rely Solely on the Payroll Tax?
      Report, IB#9-16 (pdf, 7pp/188kB), Aug. 2009
      Summary

The Case for Investing in Bonds During Retirement,
      Report, IB#9-17 (pdf, 6pp/156kB), Aug. 2009
      Summary

Social Security projections '09

On Aug. 7, the Congressional Budget Office (CBO) released the 2009 update of its long-term Social Security projections, covering the 75-year period 2009-2083. CBO "projects that the Social Security trust funds will be exhausted in 2043." The report concludes:

Long-term budget projections require a stable economic backdrop. For these projections, CBO assumed that even a large increase in federal debt would not affect economic growth or real interest rates after the first 10 years. However, CBO projects that under current law, federal debt will increase substantially, resulting in higher interest rates and slower economic growth than are assumed in this report. If that occurred, the actual shortfall in Social Security’s finances would be greater than that projected in this report.

CBO's Long-Term Projections for Social Security: 2009 Update
      Report (pdf, 44pp/328kB)
      Director's blog

Social Security projections

The Congressional Budget Office (CBO) last week updated its projections of revenues and outlays for Social Security. The report covers 75 years from 2008 through 2082. Currently the Social Security program runs an annual surplus but as baby boomers retire, beneficiaries will increase substantially.

CBO projects that outlays will first exceed revenues in 2019 and that the Social Security trust funds will be exhausted in 2049. If the law remains unchanged, the Social Security Administration (SSA) will then no longer have the legal authority to pay full benefits.

Updated Long-Term Projections for Social Security (pdf, 45pp/856kB), August 2008