Social Security – The Train Wreck That Doesn’t Need to Happen
Economist Henry Aaron said that in terms of the interaction between Social Security and government borrowing, the recession brought forward “the crossover point” — the year in which tax revenues no longer covered all the costs.
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The Fiscal Times
July 28, 2014

The Social Security Trustees released their annual report Monday and the news was, well, familiar. The trustees expect the combined Old Age, Survivors, and Disability Insurance (OASDI) trust fund to run out of money in 2033 – pretty much the same thing they said last year. (The Trustees’ report on Medicare also came out today, with somewhat better news, extending the program’s solvency by four years.)

However, as with anything discussion of Social Security, reality is a bit more complicated than it appears. First off, the OASDI trust fund, as the trustees helpfully point out, doesn’t actually exist. There is an OASI fund, and a DI fund, but they can’t be commingled.

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“The combined trust funds, and expenditures that can be financed in the context of the combined trust funds, are theoretical constructs because there is no legal authority to finance one program’s expenditures with the other program’s taxes or reserves,” they write.

In plain English, that means the solvency of one program has nothing to do with the solvency of the other. The OASI program and the DI program are legally separate entities that do not share funding. For some reason, they have traditionally been treated as a single entity in the annual reports – at least at the headline level – which tends to create confusion about their real status.

The Disability Insurance program, in fact, will exhaust its trust fund in 2016, while the much larger Old Age and Survivors program, on its own, can hang on until 2034.

There is significant public misunderstanding of just what it means for either of the two programs to exhaust their trust funds, with some concerned that the programs will stop paying out altogether. To be clear, nobody is suggesting that will happen.

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The trust funds are a sort of cushion that both programs have been drawing money from in order to make up the difference between the tax revenue they collect and the benefits they have to pay out. Even if both were allowed to expire, the trustees estimate that tax revenue would allow the OASI program to pay 75 percent of benefits indefinitely, and the DI program to pay out about 81 percent.

Of course, nobody wants that to happen, and to avoid it, lawmakers need to step in.

Clearly, action on the Disability program is the most urgent. “Lawmakers need to act soon to avoid automatic reductions in payments to DI beneficiaries in late 2016,” the Trustees wrote.

Fortunately, there is a fix for the DI program that should be relatively uncontroversial. While there is no provision for transferring assets between the two programs’ trust funds, Congress has historically made changes to the two programs’ revenue streams by dividing income tax withholding payments to the programs differently.

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In 1983, Congress altered the funding stream in such a way that put the DI program’s trust fund on course for its 2016 exhaustion. An act of Congress could re-adjust the flow of tax funds to put the DI program back on firm footing.

Of course, doing so would hasten the exhaustion of the OASI fund, making action by Congress somewhat more pressing.

Despite warnings of insolvency, most experts believe relatively small adjustments to the income stream (meaning in increase in tax revenue) and benefits payments (meaning, slightly lower payments or a change in the official retirement age) could, if implemented soon, put the OASI program on track to long-term solvency.

“Although Social Security faces no imminent crisis, policymakers should act sooner rather than later to restore its long-term solvency,” wrote Robert Greenstein, president of the Center on Budget and Policy Priorities. “ The sooner policymakers act, the more fairly they can spread out the needed adjustments in revenue and benefit formulas over time, and the more confidently people can plan their work, savings, and retirement.

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A longtime reporter on the intersection of the federal government and the private sector, Rob Garver is National Correspondent, based in Washington, D.C. He has written for ProPublica, The New York Times and other publications.