This edition of the newsletter focuses on cans, roads, kicking, and Social Security. Specifically, it delves into how to address the impending funding shortfall of Social Security. Is a 20-year solution sufficient? What about a 75-year solution? Or perhaps a solution that, based on the best estimates today, will be everlasting?
A long-term fix requires bearing the financial burden now in order to alleviate the strain on future generations. It’s akin to the approach advocated by Aesop’s ants in a debate with Aesop’s grasshopper.
On the other hand, a short-term fix makes sense if one believes that economists and actuaries are too pessimistic. It may also be reasonable if the distant future is too uncertain to base current decisions on.
I recently interviewed individuals representing both sides of this debate. But before delving into their disagreements, let’s establish some background information.
According to the latest estimate from the trustees, the Old-Age and Survivors Insurance Trust Fund will be depleted by 2033. At that point, the only source of funds for retirees and their families would be fresh payroll taxes. Based on current tax rates, these taxes would only cover 77 percent of benefits. While there is a separate trust fund for disability insurance, the trustees do not anticipate its depletion within the system’s 75-year forecast period.
On Thursday, the nonpartisan Congressional Budget Office released slightly more pessimistic estimates for the trust funds. They expect the Old-Age and Survivors Insurance Trust Fund to run dry by 2032, and the Disability Insurance Trust Fund to be depleted by 2052. The CBO also predicts that even if the trust funds were combined, they would be exhausted by 2034, resulting in tax receipts covering only 75 percent of scheduled benefits.
Rest assured, Congress will not sit idle while Social Security benefits are slashed by 23 percent or 25 percent. A solution will be reached in the coming years. The only uncertainties lie in its design and intended duration. The projected gap between revenues and expenses continues to widen, making the tax hike or benefit cut required larger for a long-term fix compared to a short-term one.
Prior to 1965, Social Security’s trustees made trust fund projections that extended “into perpetuity,” assuming that factors influencing benefit costs and revenues would level off after 85 or 90 years. However, in 1965, the trustees recognized the uncertainty of such long-term projections and declared that 75 years provides a realistic basis for estimating purposes. This time frame encompassed the period from when individuals start paying payroll taxes until they stop receiving benefits upon death, typically from age 20 to age 95.
In 1983, the main Social Security trust fund came dangerously close to depletion. A national commission led by economist Alan Greenspan presented Congress with a plan to address the program’s financial challenges. However, they were unable to reach a consensus on a solution that could last for 75 years. Congress attempted to reach this target by incrementally raising the normal retirement age from 65 to 67. Unfortunately, this fix did not endure for 75 years as intended.
The question now arises: Is 75 years still an adequate timeline to address the issue? Max Richtman, the president and CEO of the National Committee to Preserve Social Security and Medicare, believes it may be too long. He argues that the distant future is too unpredictable to base decisions on and suggests a fix that extends the main trust fund’s exhaustion by 20 years. During this period, efforts can be made to repair the system.
On the other hand, economist Laurence Kotlikoff of Boston University presents an opposing viewpoint. He believes that even 75 years does not provide enough foresight. Using appendix F of the trustees’ annual report, he highlights that there is a $65.9 trillion gap in projected revenues and costs in perpetuity. This figure is three times larger than the current gap projected for 75 years. Kotlikoff argues that assuming beneficiaries will conveniently expire at the end of the 75th year and not require benefits is unrealistic. While acknowledging the uncertainty of long-term forecasts, he emphasizes the importance of considering unknown factors and the need for “catastrophe insurance.”
Steve Laffey, a former mayor of Cranston, R.I., who is seeking the Republican presidential nomination, echoes Kotlikoff’s sentiments. He believes that the changes needed for an “infinite-horizon” fix to Social Security are not staggering for older individuals who understand the burden they have placed on younger generations.
I also spoke with Laura Haltzel, a senior fellow at the Century Foundation. She argues that aiming for an infinite horizon is unrealistic due to the multitude of factors that could change over time, such as COVID-19, inflation, and recessions. However, she disagrees with Richtman’s proposal for a fix lasting less than 75 years, stating that it would result in a compromised solution. Haltzel suggests that Congress should strive to keep their focus on the 75-year timeline, although achieving it remains uncertain.
In summary, the outlook for housing affordability in the United States, according to economists Nancy Vanden Houten and Oren Klachkin of Oxford Economics, is expected to improve marginally. Factors such as rate lock-in and a shortage of existing homes for sale are likely to support the housing market and limit the decline in home prices despite an anticipated economic recession.
To conclude, I’d like to leave you with a quote from Alissa Quart’s book “Bootstrapped: Liberating Ourselves From the American Dream,” which challenges the notion of pulling oneself up by their bootstraps. The quote highlights the surreal nature of the concept and questions how one can physically lift their own body by pulling up their boots.
“When the concept of pulling yourself up by your bootstraps was first advanced in 1834, it was understood as surreal, intended to be seen as an outlandish act — how could anyone pull up their boots to lift their own bodies?”
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