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Payroll tax can't keep pace with benefits

WASHINGTON - The bursting of the real estate bubble and the ensuing recession have hammered jobs, home prices, and now Social Security.

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.

Stephen C. Goss, chief actuary of the Social Security Administration, said that while the CBO projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.

The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned.

At the same time, revenues have fallen sharply, because millions of jobs have disappeared, leaving fewer paychecks to tax.

Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as the first step of a long, slow march to insolvency, unless Congress strengthens the program's finances.

"When the level of the trust fund gets to zero, you have to cut benefits," said Alan Greenspan, architect of the plan to rescue the Social Security program the last time it got into trouble, in the early 1980s.

That episode was more dire because the fund could have fallen to zero in a matter of months. But partly because of steps taken in those years, and partly because of many years of robust economic growth, the latest projections show the program will not exhaust its funds until about 2037.

Still, Mr. Greenspan, former chairman of the Federal Reserve Board, said: "I think very much the same issue exists today. Because of the size of the contraction in economic activity, unless we get an immediate and sharp recovery, the revenues of the trust fund will be tracking lower for a number of years."

The Social Security Administration is expected to issue its own numbers for the current year within the annual report from its board of trustees.

Though Social Security uses slightly different methods, the official numbers are expected to roughly track the CBO projections.

Mr. Goss said Social Security's annual report last year projected revenues would exceed payouts until at least 2016 because economists expected a quicker, stronger recovery from the crisis. Officials foresaw an average unemployment rate of 8.2 percent in 2009 and 8.8 percent this year, though unemployment is nearly 10 percent.

The trustees did foresee, in late 2008, that the recession would be severe enough to deplete Social Security's funds more quickly than previously projected. They moved forward the day of reckoning from 2041 to 2037.

The long-term costs of Social Security present further problems for politicians, who are struggling over how to reduce the nation's debt. The national predicament echoes that of many European governments, which are facing market pressure to re-examine their commitments to generous pensions over extended retirements.

Mr. Goss said even the $29 billion shortfall projected for this year was small, relative to the roughly $700 billion that would flow in and out of the system. The system, he added, has a balance of about $2.5 trillion that will take decades to deplete. Mr. Goss said that large cushion could start to grow again if the economy recovers briskly.

Indeed, the Congressional Budget Office's projection shows the ravages of the recession easing in the next few years, with small surpluses reappearing briefly in 2014 and 2015.

After that, demographic forces are expected to overtake the fund, as more and more baby boomers leave the work force, stop paying into the program, and start collecting their benefits. At that point, outlays will exceed revenues every year, no matter how well the economy performs.

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