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Social Security trustees: Program is healthier, Congress still must act

Happy Birthday

Happy Birthday, Social Security: FDR signs the Social Security Act on Aug. 14, 1935. Behind him (in dark suits) are progressive Sen. Robert Wagner (D-N.Y.) and Labor Secretary Frances Perkins, head of the committee that drafted the bill.

(Library of Congress)

The Social Security trustees delivered a harsh blow Wednesday to those who claim the system is structurally unsound, requiring major cutbacks. In their annual report for 2015, they declared that the program’s fiscal health has improved over the last year, for predictable reasons: The economy is improving, and workers’ wages are rising. 

The trustees moved the projected exhaustion date for the combined trust funds of the program’s old-age and disability segments one year further out, to 2034, from the 2033 date in last year’s report. But this masks the dire condition of the disability program: Its trust fund, taken on its own, will run out of money at the end of next year.

If Congress doesn’t shore up the fund by then, disability benefits would have to be cut 19%, reducing the average monthly disability check from a princely $1,016 to $823. The trustees urged Congress at least to take the short-term action of reallocating payroll tax income from the old-age program to disability to keep it fully funded; that would keep both trust funds solvent through 2033. 

Conservatives in Congress have been resisting this obvious fix, last done in 1994, in favor of concocting some broader Social Security reform--which, given the tenor of the current Congress, undoubtedly would involve benefit cuts to retirees and the disabled.

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But the new report underscores that no comprehensive change to Social Security is necessary. What’s needed is for the economy to keep improving, and for a higher share of profits to show up in working Americans’ paychecks. 

That’s good news, coming only about three weeks before the program’s 80th birthday: Franklin Roosevelt signed the Social Security Act on Aug. 14, 1935. The report also documents that Social Security is not “broke.” It’s not “bankrupt.” It’s not “failing.” Any politician that makes these claims is blowing smoke. (I’m looking at you, Rep. Paul D. Ryan, R-Wisc.)

Last year, the overall system’s surplus (payroll taxes, income taxes on Social Security benefits, and interest on trust fund investments, minus benefits and administrative costs) came to $25 billion, which got added to trust funds holding $2.8 trillion in Treasury bonds. The surplus is projected to continue until 2020, when the old-age trust fund starts to be drawn down. The trustees’ chart showing recent and projected income and outflows can be found here.

Let’s break down the findings.

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There are several major factors in the improvement. One is higher taxable wages for workers. This is reflected in a higher “real wage differential,” in Social Security jargon--the rise in wages minus consumer inflation. Put simply, wages have been rising modestly faster than inflation. This is a sign of an improving economy, and also a reminder that much of what looked like a structural flaw in Social Security during recent years was really an artifact of the long recession, in which unemployment rose sharply and the pay of workers who kept their jobs remained stagnant.

The trustees point to another intriguing factor that has gotten almost no attention recently: Premiums for employer-sponsored health insurance have been rising more slowly. Because health insurance premiums are exempt from the payroll tax, the trustees observe, their slower growth means that a higher share of employee pay comes in wages, which are subject to the tax. 

At this point, it’s impossible to say how much of this slowdown, if any, can be attributed to the Affordable Care Act. What is known is that numerous ACA provisions have combined to put a brake on rising healthcare costs; this trend sooner or later should show up in employer plan premiums.

The trustees also point to President Obama’s 2014 executive order on immigration, which aimed to encourage undocumented workers to come out of the employment shadows and into employment covered by Social Security without fear of deportation. The order has been blocked by a federal appeals court in New Orleans, but the trustees assume that the stay will be temporary and the presidential order will go into effect by the end of this year, yielding higher revenue for the program.

What’s imperative is that these trends be sustained. As economist Dean Baker of the Center for Economic and Policy Research observed Wednesday, the suppression of wages for workers in recent years has increased the portion of national wage income exempt from payroll tax, which this year is levied only on the first $118,500 of wage income. “Wage growth is the key to the program’s solvency,” he writes.

Baker points out that the last major revision of payroll tax rates in 1983 was designed to cover about 90% of all wages earned in the U.S. Income inequality has since reduced that share to only 82%, contributing to a huge erosion in the program’s fiscal health. Had the tax continued to cover 90% of wages, the trust fund today would be larger by more than $1.2 trillion--or roughly 45% larger than it is today, pushing the exhaustion date out by a decade at least. 

Keep up to date with the Economy Hub. Follow @hiltzikm on Twitter, see our Facebook page, or email michael.hiltzik@latimes.com.


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