Q: What will happen to Social Security benefits when the Trust Fund is exhausted?

Q: What will happen to Social Security benefits when the Trust Fund is exhausted? January 19, 2018

https://commons.wikimedia.org/wiki/File:Social_security_card.gif; originally produced by the Social Security Administration and in the public domain

A. Nothing.

Yes, maybe in the meantime, we’ll get a full-on reform of the system.  But if we don’t, this is what will happen:  Congress will just, in what will be called the “Social Security fix” in the same way as we had the “doc fix,” pass legislation that provides that, “temporarily,” any FICA shortfalls will be funded by general revenue.  And this will be extended from year to year to year.

Folks, the pension plans of the S & P 500 are 83% funded.

State pension plans are 72% funded.

Social Security is 76% funded — to be sure, based on a wholly different funding methodology, but it’s still something of a reference point.

But the “pension crisis” isn’t fundamentally about meeting a deadline to rewrite Social Security legislation.  It’s a bigger picture issue.

A Brookings report that crossed my twitter feed the other day, “The long-term impact of aging on the federal budget,” modeled the impact of aging on the federal budget, in general.  That is,

Just 10 years ago, the share of the population that was 65 or older was only 12½ percent. Today, it is 15 percent, and in just 20 years, it is projected to reach 21 percent.

As a result, in comparison to 2017’s federal spending, 20.5% of GDP, by 2046, solely due to the impact of the ageing population, that spending will increase to 29.4%.  And this isn’t just a temporary “hump” due to the Baby Boom:

Although we often talk about aging as arising from the retirement of the baby boomers, that is somewhat misleading. The retirement of the baby boomers represents the beginning of a permanent transition to an older population, reflecting the fall in the fertility rate that occurred after the baby boom and continued increases in life expectancy. Because aging is not a temporary phenomenon, we can’t simply smooth through it by borrowing. Instead, it is clear that population aging will eventually require significant adjustments in fiscal policy—either cuts in spending, increases in taxes, or, most likely, some combination of the two.

This is what matters, not an artificial deadline of the depletion of the Trust Fund.

 

Image: https://commons.wikimedia.org/wiki/File:Social_security_card.gif; originally produced by the Social Security Administration and in the public domain

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