Recession puts more stress on Social Security

By Andrea Coombes
March 23, 2010

SAN FRANCISCO - Social Security provides a majority of the retirement income for about two-thirds of Americans over age 65, but if you're in your mid-50s or younger, it's time to make alternate arrangements.

The program's dismal outlook has long been known, but the recent economic crisis further scarred the program's finances, bringing closer the day of reckoning when receipts no longer cover benefit payouts.

That's bad news for anyone in their mid-50s or younger because proposals that aim to put the system on sound financial footing almost invariably protect current beneficiaries and people near retirement age, but everyone else can expect either benefit cuts or tax increases or possibly a bit of both.

The program's annual costs will exceed revenues in 2016. Then, that shortfall is covered by the system's trust fund through 2037 - four years earlier than expected a year ago. (One reason: lower payroll-tax revenue thanks to the steeply higher unemployment rate.)

At that point, payroll-tax revenues still cover about 75 percent of benefit payouts through 2083.
So, keep in mind that even if nothing is done, it's not as though benefits are eliminated, even over the next few decades.

Of course, some people might respond: What trust fund? It's essentially an accounting placeholder - a note detailing what the government owes itself. There's no cash pile waiting to be paid out to needy retirees.

Some people have said that, given the weight of its other financial obligations, the federal government will be forced to renege on its Social Security obligations. But experts, liberal and conservative, say that scenario is highly unlikely.

"Some people say the government will default on the trust fund and won't pay. That won't happen," said Andrew Biggs, a resident scholar at the Washington-based American Enterprise Institute and a former deputy commissioner for policy at the Social Security Administration.

"If they don't want to repay it, (the government can) simply cut Social Security benefits, raise the retirement age, raise taxes. . . . It's all under the control of the government basically," he said.

Still, he said, "it may not be paid back on time in the sense that we'll pay promised benefits through 2037 - my sense is we'll cut benefits way before the trust fund runs out."

Others said the government's promise to Social Security recipients is likelier than other vows to be kept.

"The problem is really the government as a whole is in a deficit position. That doesn't mean they won't meet that particular commitment but the question of how we're going to meet all of our commitments fiscally is kind of up in the air," said Eric Toder, an institute fellow at the Urban Institute in Washington. "I don't think that's one they're likely to default on."

Benefit cuts more likely
People paying into the system now are highly likely to get less than is being promised currently.

"The chance that people won't receive their full promised benefits is actually quite high," Biggs said. "How big those benefit cuts will be and who they might affect is an open question." Still, "most of the reforms out there wouldn't touch people who are 55 and over and they also wouldn't affect low-income people."

Some say benefit cuts are less likely than raising payroll taxes to bridge the system's shortfall.

Given the recent hit to people's retirement plans, there's "increasing recognition how important Social Security is, and how it serves as a backbone for most people's retirement income," said Alicia Munnell, director of Boston College's Center for Retirement Research. "I'd be surprised if there was any major cutting in the proposals to fix the system."

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