Social Security's Fate

Krugman in an op-ed in the New York Times explains that in a worst case scenario of no action, the Social Security Trust fund keeps it solvent for another 12 years and then benefits get slashed by 20% as the trust fund can no longer buffer the shortfall of current receipts relative to current expenses while bearing the full weight of the Baby Boom generation.

Put another way, to keep 100% of current anticipated benefits, Social Security revenues need to increase by 25% in 2035, or somewhat less than that if revenues start to increase sooner. 

This is happening 25 years sooner than actuaries predicted it would in 1981 when major reforms to the system were put in place.

[I]n 1981 a bipartisan commission set out to secure Social Security’s future. It tried to do so with two measures. First, it increased the payroll tax rate; the idea was to make Social Security a bit more like a “real” pension fund by taking in more than it was spending, building up a serious trust fund that could help defray costs once the baby boomers hit the system. It also set in motion a gradual rise in the age of eligibility for full benefits, which started at 65 and will reach 67 for those born after 1960.

All of this was supposed to secure the system’s finances until 2060. It did in fact buy the system a number of decades, but the Social Security Administration currently expects the trust fund to be exhausted by 2035. 

The main reason for the shortfall, as I understand it, is that taxable wages have grown more slowly than expected, which in turn is largely the result of rising inequality: A growing share of overall income has gone to people with really high earnings, and much of that income isn’t subject to the payroll tax with its limit.

The Impact Of Interest Rates And COVID

I think Krugman is probably overlooking, in furtherance of advocacy, the impact of sustained very low interest rates on federal Treasury Bonds in the last fifteen years and have only just returned to the rates that they were at prior to the Financial Crisis of 2007-2008, the only time period in recent history in which Treasury bond interest rates were below 4% for more than a very brief time period since at least the 1960s. 

This has left the Social Security trust fund with lower than its anticipated earnings as of 1981 when Treasury bond interest rates were at record highs that peaked at more than 15%. 

But Treasury bond interest rates look likely to be above 4% going forward and this could significantly improve the financial outlook for the Social Security trust fund.

Ten Year Treasury Bond Interest Rates (Source)

The twelve year to insolvency estimate also probably don't fully reflect the probable impact of COVID-19 on Social Security's benefit obligations, however. Current estimates show only a modest COVID impact on the Social Security trust fund, but that assumes that excess deaths cease in 2023 which currently seems unlikely, even though they are waning a bit.

The lion's share of people suffering premature deaths from COVID are already receiving Social Security benefits or imminently about to do so. 75% of the 1,113,560 COVID deaths to date (as we are nearing the three year anniversary of the first significant numbers of deaths from COVID) are of people 65 years of age or older. Another 18% are of people age 50-64 year old. So, 93% of COVID deaths have been of people age 50 years old or older, and deaths in the 50-64 year old age range are still strongly biased towards the high end of this age range. There have been 73,435 COVID deaths of people under age 50 in the last three years and even among those deaths, 62% have been of people in their 40s. Just 2.5% of COVID deaths have been of people less than 40 years old. 

As an aside, the number of deaths for women are lower than the number of deaths for men at all ages under age 85. Women account for 56% of COVID deaths at age 85 and up, but this is because they make up 64% of the population age 85 and older due to their longer life expectancies. The death rate of women from COVID is lower than the death rate of men from COVID at all ages. Overall 55% of COVID deaths are men and 45% are women, and more than 55% the people who died of COVID under age 85 are men.

Also, rather than ceasing to be a problem after the year 2023 as Social Security actuaries have assumed, COVID-19 looks like it will continue to be a leading causes of death for people age 50 and up for the foreseeable future, in part, because the COVID vaccines and actual infection with COVID only seem to provide full immunity for a matter of three to six months, even though they are quite effective at preventing death from COVID as shown in the chart below:

As of February 24, 2023 the U.S. is experiencing COVID deaths at a rate of about 125,000 per year. There is also no assurance that some new variant won't lead to a new spike in COVID deaths like four previous spikes after the initial spike of COVID deaths in the U.S. over the last three years.

Notably, COVID deaths aren't being substituted for many deaths from other causes in the same demographic. The main source of the discrepancy between excess deaths and COVID deaths is due to deaths outside hospitals that are probably due to COVID in people who weren't tested for COVID when they were sick.

COVID-19 and rising interest rates on Treasury bonds combined will probably push the twelve year date for the Social Security trust fund to run out by a number of years, even if there are no changes to the system.

Potential Policy Solutions

Modest tweaks to the Social Security program could greatly mitigate this issue, such as: 

(1) increasing the retirement age which is currently age 67 for people born in 1960 or later who are currently 62 to 63 years old, and will hit their increased retirement age sometime in the year 2027.

(2) increasing the maximum income subject to Social Security payroll taxes from the current $160,200, 

(3) expanding the wage base to include non-payroll, non-self-employment income, as the 3.8% Obamacare tax on investment did for Medicare, 

(4) increasing the payroll tax from its current 7.65% for employees and 7.65% for employers (a combined 15.3%),  with a nearly equivalent self-employment tax rate that adjusted for the lack of an employee/employer FICA tax split (which works out to about 14.13% of unadjusted self-employment income), 

(5) allowing some of the Social Security Trust fund to be invested in something other than Treasury Bonds which almost by definition have the lowest return on investment of anything it could be invested in, as almost all state and local government pension plans in lieu of Social Security do), 

(6) capping high end benefits for high wage earners more than the current system does or means testing benefits above a certain level, or 

(7) using new revenue sources like a tax on tax favored retirement plan assets with high benefits, a tax on tax favored retirement plan distributions, or earmarking new or existing gift and estate tax revenue for this purpose. 

 

Krugman notes that there is nothing sacred about funding Social Security, which isn't truly comparable to a private pension plan, with something other than payroll taxes. 

Krugman doesn't mention it, but the fact that the number of workers supporting each person receiving Social Security benefits is projected to fall to a record low of 2.1 people working per person receiving benefits also argues against a plan to increase revenues solely with payroll taxes.

Life Expectancy At Age 65 Is Tied To Income

Krugman also notes that the link between income inequality and life expectancy inequality impacts what seems fair since people in the top half of incomes live five and a half years longer on average than people in the bottom half of income (whose retirements actually cost the system less per year since Social Security benefits are still tied, albeit in a progressive fashion, to lifetime earnings). 

People in the bottom half of incomes had an average life expectancy at age 65 which was one year longer in 2006 than it was in 1977. People in the top half of incomes had an average life expectency at age 65 which was six years longer in 2006 than it was in 1977. 

This disparity was only about 3% for people who reached age 65 in 1977, but has grew steadily through 2006 to a 34% disparity, and shows every sign of continuing to grow. 

This is so despite the fact there all senior citizens in the U.S. are part of Medicare, a national single payer healthcare system for almost everyone aged 65 plus in the United States. 

This is also true despite the fact that low income people receive a far larger share of the taxes they paid back in Social Security benefits than higher income people do, effectively making up for a larger share of their income during their working years. Middle class people are less reliant upon Social Security benefits in their retirements than working place people.