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US Social Security Nears Funding Crisis

by Mike Godfrey,, Washington

06 September 2012

A commentary by one of the public trustees for United States Medicare and Social Security has concluded that the latter’s future, at least in its present form, is now ‘greatly imperilled’ as the last few years of legislative neglect have drastically harmed the programme’s future financial prospects.

Charles Blahous, a senior research fellow at the Mercatus Center at George Mason University, and a public trustee for Medicare and Social Security, has warned that “individuals now planning their financial futures, whether as taxpayers or as beneficiaries, should be pricing in a substantial risk that the federal government will not be able to maintain Social Security as a self-financing, stand-alone programme over the long term".

"If Social Security financing corrections are not enacted in 2013, or at the very latest by 2015, it becomes fairly likely that they will not be enacted at all,” Blahous warns.

Published in April this year, the 2012 Social Security Report on the strength and viability of US retirement and disability programmes, has already pointed out that funding pressures on them are mounting.

Overall, it was projected that, when considered on a combined basis, Social Security’s retirement and disability programmes have dedicated funds sufficient to cover benefits for the next 20 years, but in 2033, incoming revenues and trust fund resources will be insufficient to maintain payment of full benefits. After that time, dedicated funds will be sufficient to cover about three-quarters of full benefits.

At the end of 2011, the Social Security programmes were providing benefits to about 55m people, and, during the year, an estimated 158m people had earnings covered by Social Security and paid payroll taxes. However, Social Security’s cost continued to exceed both the programme’s tax income and its non-interest income, a trend that is projected to continue throughout the short-range period and beyond.

The projected Social Security annual cost rate increases from 13.83% of taxable payroll for 2012 to 17.41% for 2035, and to 17.83% for 2086. Expressed in relation to projected gross domestic product (GDP), Social Security costs rise from the current level of 5.0% of GDP to about 6.4% by 2035, and then declines to around 6.0 through 2086. For the 75-year projection period, the actuarial deficit is 2.67% of taxable payroll, 0.44% larger than in last year’s report.

Blahous pointed out that: “figures such as 2033 and 2.67% make it appear – incorrectly – as though there are several years remaining to act, and only a modest problem to solve.” There are also, he added, a multitude of proposals available that would attempt to rectify the problem.

He indicated that political proposals from the right tend to focus on cost containment (for example, slowing the growth of benefits and/or raising eligibility ages), whereas proposals from the left tend to focus on raising taxes. However, he added that “this multitude of proposals in no way implies that a solution is readily achieved.”

In his opinion, "a solution is rapidly becoming more difficult “because the baby boomers are starting to retire, and lawmakers have historically been very reluctant to cut benefits for beneficiaries once they start receiving them.”

"This means that any sacrifices will likely be concentrated on younger generations who already face net income losses through Social Security as it is,” he continued. “With every further year of delay lawmakers must therefore consider sharper benefit growth reductions and/or tax increases,” and a political compromise becomes ever more difficult to achieve.

Blahous considered that the proposal, from one side of the political spectrum, to slow future benefit growth to the rate of price inflation for high earners, while allowing low-income earners the higher growth rate of wage inflation and leaving previous beneficiaries unaffected, would no longer work. In fact, “even if we slowed everyone’s benefit growth – from the poorest to the richest – to price inflation, we could no longer maintain solvency while holding harmless those over the age of 55.”

On the other hand, “the efficacy of tax-increase solutions is also fading with delay. Advocates on the left sometimes argue to increase the amount of Social Security wages subject to the payroll tax. The most extreme version of this proposal would be to raise the amount of wages subject to the full 12.4% payroll tax - USD110,100 today - up to infinity. Yet even this drastic measure would now fail to keep Social Security in long-term balance as well.”

“We are thus approaching the point where each side would have difficulty balancing Social Security finances even if it could dictate the solution,” he concluded, “and rapidly passing the point where a compromise solution remains.”

A comprehensive report in our Intelligence Report series titled "The Lowtax International Pensions Report" which has an in depth view on The Mechanics of Pensions Provision, 'High-Tax' Country Pension Regimes and 'Lowtax' Jurisdictions In Which To Locate Pensions Savings, is available in the Lowtax Library at and a description of the report can be seen at
TAGS: individuals | tax | investment | economics | business | pensions | fiscal policy | law | retirement | payroll | social security | United States | business investment

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