That would instantly solve social security, according to a new report – The Fool Motley

Stop me if you've heard this before: social security is in trouble.

There is a good chance that you have stopped or resumed the thick and obvious sarcasm, since the Social Security Administration Board has warned against a long-term revenue collection (75 years) insufficient, compared to planned spending, with each annual report since 1985.

A few weeks earlier, directors had released their latest annual report on the short-term (10 years) and long-term prospects of the largest social program in the United States. and, like the many reports before it, the "Judgment Day" of social security is fast approaching

Ongoing demographic changes weaken social security

According to the report, social security should start spending more than its revenues in 2020, narrowly avoiding this point of undesirable inflection in 2019, with a net cash surplus estimated at $ 1 billion. This expected transfer (ie, net cash surpluses to net cash outflows) is the result of a number of ongoing demographic changes, including increased longevity, increasing income inequality, reduced retirement of baby boomers.

Beyond 2020, the situation is starting to get really ugly. On the one hand, Social Security has accumulated $ 2.9 trillion in asset reserves (ie its total net cash surpluses) since its inception. This provides some degree of buffering if the program starts to spend more than it collects. On the other hand, the magnitude of this net cash outflow is expected to increase year by year. According to the latest directors' report, by 2035, this $ 2,900 billion will be completely exhausted.

The good thing for seniors, if there is one in this mess, is that social security runs no risk of bankruptcy or insolvency. The recurrent income it will receive from the 12.4% wage tax on labor income, as well as from the taxation of Social Security benefits, will provide a lot of revenue for the payment to eligible beneficiaries.

But, to be perfectly clear, this does not mean that the existing payment schedule, including cost-of-living adjustments (COLAs), is sustainable beyond 2035. If the asset reserves of Social Security are exhausted, benefits will be reduced by 23% may be necessary for retired workers of the present era and future retirees to maintain the old age and survivors' pension payments.

In terms of the total deficit, Directors anticipate the need to close a gap of $ 13.9 billion between 2035 and 2093, $ 700 billion more than the long-term deficit forecast in the 2018 report.

That would instantly solve the $ 13.9 trillion shortfall in social security

It is clear that lawmakers must do something very quickly to strengthen the social security of current and future retirees. The big question remains to know what this patch should entail.

But according to the recently released directors' report, there is a solution that could be implemented, with congressional approval, which would instantly solve the $ 13.9 billion shortfall in social security over the last few years. Next 75 years.

Each report of the trustees contains a figure called "actuarial deficit". In simple terms, this figure describes how much the payroll tax would need to increase aujourd & # 39; hui to fully cover the funding gap over the next 75 years (based on the current payment schedule, including COLA), while leaving sufficient asset reserves to cover a full year of expenditures by 2094 (ie a trust fund ratio of 100%). In the 2019 report, the actuarial deficit was 2.78%, which was 6 basis points lower than in the previous year.

According to the report of the administrators, if Congress increased from 2.78% to 15.18% the current payroll taxes of 12.4% on labor income, the cash deficit of the Social Security would disappear over the next 75 years . Although we would still see a decrease in the trust fund ratio by 2093 (289% in 2018), the program should remain sufficiently capitalized not to impose a reduction in benefits to future retirees.

This is why lawmakers and the public are not big fans of this approach

If the 2.78% increase in the payroll tax makes it easy to solve the social security shortfall, you probably wonder why it was not implemented by the Congress or pushed by the public.

As far as Congress is concerned, the reasoning is simple. Lawmakers understand that there is no social security solution that allows everyone to win. To improve social security, either by raising incomes or reducing benefits, we mean a certain group of people, be they better off, working-age Americans, or future generations of workers who will be in a state of work. worse than before. This is a potential recipe for elected officials to lose votes in an upcoming election, which has prevented Congress from lobbying for reform.

And when it comes to the American public, they mostly prefer to pass on tax increases exclusively to the rich. Wage tax of 12.4% on earned income limits to $ 132,900 in 2019, all income earned (wages and salaries) beyond being exempt from this tax. Since more than 90% of workers will earn less than this amount in 2019, they pay social security taxes for every dollar earned. Thus, increasing or removing the tax cap would have no impact on more than nine in ten working Americans.

But this is not what directors expect with the actuarial deficit. They suggest an additional payroll tax of 2.78% on all US workers earning between $ 0.01 and $ 132,900. Although polls show that the public is favoring increased revenue through an increase in taxes rather than a reduction in benefits, it is almost certain that they will much less willing to accept a general rise in the wage bill of this magnitude compared to a simple increase in the rate on the rich.

In addition, if you are curious as to why the preferred solution of the public has not been implemented, it concerns the rich who already pay their fair share because of the ceilings in force for the monthly benefits at the end of the year. retirement age.

So, we have our dilemma. A corrective exists that could put an end to the shortfall of social security at the moment, but the paths leading to this resolution are marked by obstacles which, for the moment, seem insurmountable.