Several of the 2020 Democratic presidential candidates will propose increasing the Social Security benefit for current retirees.
They'll suggest paying for it by increasing the Social Security payroll tax and eliminating the current cap on income ($132,900) that's affected by the tax.
Those candidates need to take a long, hard look at the latest annual report from the Social Security trustees. There are lessons in that report, if only Democrats will learn them.
Lesson 1: A strong, private sector economy improves the Social Security trust funds.
The trustees tell us that the 75-year actuarial deficit—i.e., the amount Social Security will have to pay out above its expected revenue—improved slightly, from 2.84 percent of taxable payroll in the 2018 report to 2.78 percent.
However, the reason for that slight improvement, even as Social Security had to pay more benefits—$946 billion cited in the 2018 report to $994 billion in the current report—is the strong economy with historically low unemployment rates.
More people working in the private sector means more payroll tax revenue. Not enough to make a major difference in the trust funds, since the unfunded liabilities are too large, but at least it makes a small positive difference.
Lesson 2: Social Security is still headed for bankruptcy.
The Old-Age and Survivors Insurance (OASI) Trust Fund that covers about 53 million mostly seniors is still scheduled to be depleted by 2034—just 15 years from now.
At that point the trustees estimate that Social Security will only be able to pay about 75 cents on the dollar. And that’s only if you believe that the trust funds, with a reported $2.9 trillion in assets, really exist.
Congress has borrowed all of that money and spent it. Congress can only replace those funds by taking other tax revenue or borrowing the money. In other words, that $2.9 trillion in the trust funds should be considered a liability, not an asset.
Lesson 3: The financial challenges will only worsen.
Democrats will say they can solve the problem by raising taxes. But the trustees claim that increase would have to be 2.78 percent of payroll. And that’s just to keep the status quo. Democrats want to increase current benefits—by 2 percent in one proposal.
And the population continues to age, which means that fewer workers will be available to support each retiree.
Even as most private sector companies have transitioned their pension plans to 401(k) accounts to improve their financial stability and avoid long-term liabilities, Democrats want to move in the opposite direction.
The best lesson Democrats could learn from the trustees’ report is that all the tweaking of Social Security’s taxes and benefits over 80 years have only made the financial challenges worse. Time to follow the private sector’s 401(k) approach and solve the problem for good.