Entitlements Safe for Now, But Jobs Remain Key

By Tom Curry
|  Thursday, Aug 5, 2010  |  Updated 4:31 PM CDT
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Entitlements Safe for Now, But Jobs Remain Key

AP

The new Social Security trustees report shows how the short term collides with the long term: If unemployment remains near 10 percent, that’s not only an urgent problem for Americans trying to pay their mortgages it’s a long-term entitlements problem.

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Social Security is paying out more in benefits than it’s getting in tax revenue, the trustees of the system said Thursday in their annual report. The costs will exceed tax revenues next year as well, they said.

Retirees will still get full benefit checks this year and for the next 27 years.

Despite the drop in revenues caused by the recession, the trustees estimated, as they did in last year’s report, that the point at which the Social Security funds will be exhausted will be 2037.

But what happens then?

A retiree expecting to get $1,000 worth of benefits would get only $780, unless Congress takes action before then to increase taxes or raise the eligibility age (currently 67 for a worker born in 1960).

The new report also showed how the recession is putting another strain on the Social Security system: an 11 percent increase in disability payments. Disability applications for 2009 were nearly 260,000 above the 2008 level. The trustees said this was “due to the impact of the economic slowdown.”

Massachusetts Institute of Technology economist David Autor said, “It's indeed a serious problem that the DI (disability insurance) rolls are growing so rapidly. The combination of rising full retirement age (leading to early application for disability) and — most especially — the deep recession have led to a huge increase in applications and long-run expenses."

The new report shows how the short term collides with the long term: If the unemployment rate remains near 10 percent, it’s not only an urgent problem for Americans trying to pay their mortgages and search for a job, it’s an entitlements problem.

When people aren’t working, they’re not paying Medicare and Social Security taxes. Revenues collected from Medicare and Social Security taxes are down 4 percent through June of the current fiscal year, compared to the first nine months of 2009.

What will unemployment rate be in future years?
The trustees estimated Thursday that unemployment rate will remain at 9.5 percent next year and then decline slowly and reach 5.5 percent by 2018.

They also foresee a 5.5 percent unemployment rate plateau for several decades beyond that.

But if higher unemployment — today’s 9.5 percent jobless rate compared to the 5.5 percent average during the 1990s — becomes “the new normal,” then paying for those entitlements programs becomes problematic.

“If it’s a temporary blip, then it’s not a huge problem,” said Frank Todisco, senior pension fellow at the non-partisan American Academy of Actuaries in Washington. “But if it’s the new norm, then that’s a significant problem.”

Todisco also explained why, despite the recession-caused revenue shortfall, Social Security’s insolvency date is still estimated to be 2037, instead of sooner.

It’s an indirect impact of a new tax in the health care reform law, he said. The law Congress passed this year will, as of 2013, impose a tax on high-cost employer-sponsored health insurance, so-called “Cadillac” plans.

This tax, the trustees figure, will cause companies to slim down their health insurance plans and instead give workers more in wages. Those increased wages would, of course, be subject to the Social Security tax, thus increasing revenue to the program and making it more solvent.

Thursday's report was issued as the National Commission on Fiscal Responsibility and Reform(appointed by President Barack Obama) struggles to reach consensus as it heads towards its December deadline. Progressive groups fear that the panel will recommend increasing the Social Security eligibility date or perhaps some other cut in benefits.

In their report, the trustees reminded Congress that it has a number of options for fixing Social Security’s long-term solvency:

-- Hike the payroll tax rate by 1.84 percentage points.

-- Cut benefits by 12 percent.

-- Shift $5.4 trillion into Social Security from general tax revenues.

-- Or some combination of those steps.

Future unemployment is only one factor that actuaries weigh when they figure out how viable the entitlements programs will be in future years: worker productivity, immigration, and other factors also affect predictions.

But as the recession has underscored, the number of people working is vital.

Five million fewer workers than in 2007
Today’s workers — and there are about five million fewer of them now than there were in 2007 — must pay for the Medicare and Social Security benefits for today’s disabled and retired people.

Joblessness matters in both the short and the long term: a worker who lost his job last year has less ability to set money aside for retirement in his 401(k) or Individual Retirement Account — or perhaps he had break into those savings to pay current bills.

For him and millions like him, the solvency of Social Security will become even more crucial once they reach the eligible age for collecting benefits.

The nonpartisan Employee Benefit Research Institute said Thursday that almost one-half of Americans who are currently ages 56 to 62 are at risk of running short of money to cover their basic needs in retirement.

In their report, the trustees said there were about three workers for every Social Security beneficiary in 2009. The ratio is falling and will reach about 2.2 in 2030. So fewer workers will have to carry the burden of more retirees.

There are twice as many people getting Social Security benefits today as there were in 1970; and in 2040 there will be nearly twice as many as there are now.

Longer lifespans mean longer retirements
And thanks to better medical care, people are living years longer than their parents.

In 1940, a 65-year old man could expect to live, on average, another 12 years and woman could expect to live another 13 years.

Today, the trustees’ report said, a 65-year old man can expect to live another 17 years, while his female counterpart can expect to live another 20 years.

And Social Security is a lifetime annuity, even if you survive to 105. The longer you live, the longer workers will need to support you.

The good news Thursday was that the trustees estimated that the Medicare hospital fund will not be exhausted until 2029, 12 years longer than they estimated last year, due to savings mandated by the health care reform law Congress passed this year.

This was in line with the estimate last April from Medicare chief actuary Richard Foster who said the health care law would improve Medicare’s solvency by saving $575 billion over the next ten years.

Cutting Medicare spending
Foster said that the law would cut payments to hospitals, hospices, and other medical care providers by about $500 billion and raise $63 billion in new revenue by increasing the Medicare tax on individuals with incomes above $200,000 and families with incomes above $250,000.

But as both Foster and the Congressional Budget Office explained, Congress cannot simultaneously use the expected savings to both improve Medicare’s solvency and to pay for new spending outside of Medicare.

To claim it can do both at the same time “would essentially double-count a large share of those (Medicare) savings and thus overstate the improvement in the government’s fiscal position,” CBO said.

In addition, Foster warned that the expected $233 billion in Medicare savings coming from higher medical productivity “may be unrealistic.” He said it was “doubtful” that many hospital and hospices will be able to improve their productivity as much as Obama administration and Congress expect.

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