The Independent Market Observer

Social Security Faces Its First Reckoning

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 23, 2015 1:24:00 PM

and tagged In the News

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social securityNot that long ago, we were discussing the inevitable financial collapse of the U.S. Deficits were through the roof, so was the debt, and all that remained was to find out just how it would end, with a bang or a whimper.

Several years later, of course, things are much better. The deficit is at very low levels by the standards of the past 30 years, the debt hasn’t proven to be the problem it was thought to be—interest rates remain low, and there are no signs of rapid inflation growth—and the U.S. economy is actually in good shape, all things considered.

Unfortunately, this doesn’t mean that the problems we worried about have all gone away. Just recently, a big one hit the radar: the social security disability program is set to run out of money in 2016, and benefits may be cut by 19 percent, absent government action.

Disability program in peril

Big picture, social security consists of two programs—retirement insurance and disability insurance—which have separate supporting trust funds and separate income streams. The trust fund for the disability program will be exhausted in 2016, leaving only the tax-funded income stream to support payments. Right now, those taxes cover 81 percent of benefits, with the difference paid from the trust fund. When the trust fund is depleted, so are the top-up payments, and benefits will have to be cut.

The retirement program trust fund still has lots of money and, based on current estimates, isn’t set to run out until around 2035. At that point, payments could be cut by 25 percent but would then be sustainable. A third insurance program, for Medicare, is also projected to run out in 2030. These are concerns, but not immediate ones.

Big problems, but not insurmountable

A cut in disability benefits would affect around 11 million people, so some government action is quite likely. The easiest fix would be to allow transfers from the retirement program trust fund to the disability program, extending the life of the disability payments at the cost of a slightly shorter life for the retirement trust fund. This was done in the 1990s, so it has some precedent, but would likely face Republican opposition.

The bad news is that the disability program is probably in for some changes, if not a 19-percent benefit cut. Hopefully, the situation will force reforms to extend the solvency of the much larger retirement and Medicare programs. (Many changes have already been made, and more are proposed, to do exactly that.)

Clearly, there are real problems with social security that must be resolved, just as there were in 2008 and 2009. The good news is that we’re in a much better position to solve them than we were then. If you’re expecting political theater, I doubt you’ll be disappointed. But remember: despite the potential noise, these problems are highly solvable.

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