CRS: Social Security: What Would Happen If the Trust Funds Ran Out?
(Dan here…reposted due to discussion in a previous thread)
CRS: Social Security: What Would Happen If the Trust Funds Ran Out?
Very interesting paper that I missed in real time.
Social Security: What Would Happen If the Trust Funds Ran Out?
Almost everyone who addresses this question assumes that the answer is pretty simple: if either of the Social Security Trust Funds goes to zero than benefits will automatically drop from ‘Scheduled’ to ‘Payable’ which translates to a 22-25% overnight cut depending on which Trust Fund we are talking about. But I had an interesting conversation with Andrew Biggs some years back. Andrew is a very prominent advocate of Social Security ‘reform’ which he sells on the basis that the system is ‘unsustainable’. As such he and I and Coberly and he have had some vigorous debates over the years, and mostly he is firmly in the ‘bad guy’ category on policy. For all that he is a nice guy and really, really knows the numbers and laws in play. Not least because he spent some time as the Principal Deputy Commissioner of Social Security (the no. 2) during the Bush Administration.
With that as background Biggs told me that the situation at Trust Fund Depletion was not as clear-cut as almost everyone assumed and had been the topic of some high end discussion at SSA. And their conclusion as related by Biggs to me mirrored that of the Congressional Research Service in this Report from last year.
The Social Security Trustees project that, under their intermediate assumptions and under current law, the Disability Insurance (DI) trust fund will become exhausted in 2016 and the Old-Age and Survivors Insurance (OASI) trust fund will become exhausted in 2034. Although the two funds are legally separate, they are often considered in combination. The trustees project that the combined Social Security trust funds will become exhausted in 2033. At that point, revenue would be sufficient to pay only about 77% of scheduled benefits.
If a trust fund became exhausted, there would be a conflict between two federal laws. Under the Social Security Act, beneficiaries would still be legally entitled to their full scheduled benefits. But the Antideficiency Act prohibits government spending in excess of available funds, so the Social Security Administration (SSA) would not have legal authority to pay full Social Security benefits on time.
It is unclear what specific actions SSA would take if a trust fund were exhausted. After insolvency, Social Security would continue to receive tax income, from which a majority of scheduled benefits could be paid. One option would be to pay full benefit checks on a delayed schedule; another would be to make timely but reduced payments. Social Security beneficiaries would remain legally entitled to full, timely benefits and could take legal action to claim the balance of their benefits.
The Report proceeds to outline the possible responses and is interesting for that alone. More important for my purposes though is the suggestion that the “conflict between two federal laws” precludes the option of Congress just sitting back and letting “automatic” cuts happen. Because as Biggs some years back and CRS last year point out, there is nothing automatic about this at all.
Anyway something to talk about for those of us jonesing over the release of the 2015 Social Security Report. Which my fellow junkies is scheduled for tomorrow (Wednesday) probably at 1PM Eastern. If past file name practices are observed the web version should be available via URL: The 2015 OASDI Trustees Report, while a PDF version should be viewable or downloadable at: THE 2015 ANNUAL REPORT of the Board of Trustees of the Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.
Updated URI version: The 2019 OASDI Trustees Report and the Updated PDF version: The 2019 Annual Report of the Board of Trustees of the Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.
I should have another post up with these same links prior to Report Release. But anyone who wants to bookmark the URLs and try to get a jump on just about everyone else in the country should feel free.
What Trust Funds to run out — or should I ask how much is there to “run out”? There’s only three years of full payout in there — not counting the one year you have to hold back for temp fill ins, should FICA fall short, (happened couple of times I believe.
The words sound so consequential — the actuality is that the TF uses income tax to cover shortfall of FICA tax. When the bonds that are the mechanism for that rus out (quickly), guess what: we’ll have to actually raise FICA income to match SS outgo. Doesn’t seem like anything remarkable. But the words …
The actuality is that FICA taxes are credited to the TF and mature Special Treasuries are credited to the TF and benefits are paid from the TF.
To say that the TF uses income tax is just wrong.
?????? “Special Treasuries are credited to the TF and benefits are paid from the TF. ”
Please tell me who buys those Special Treasuries?
“Please tell me who buys those Special Treasuries?”
As you know I know, it is the general fund, but since it is only money returning to the TF, it meaningless to debate whether it is income tax, estate taxes, or tariffs coming from the general fund.
“Meaningless” [:-)] question. Doesn’t income tax ultimately cash bonds — any kind of bonds? If not, what? ???
I think you need to actually define what you mean by “cash”.
So, Bruce, to update the old “Rosser equation” matter, that 77% is of benefits being paid at that time. How does that 77% compare to what is being paid now? It is certainly more than 77%, although it may not be more than 100% as was the case over a decade ago when I made estimates on all that.
That is an old Bruce comment. I did ask Coberly the same. I agree with your asking about today’s percentage as compared to the time the original question was asked. It would be different.
All treasury notes have a term. At the end of the term, the purchase price of the treasury is refunded to the purchaser. That’s what is meant by to “cash bonds.”
AFAIK, there are three sources of money to cash bonds:
1. tax revenue
2. borrowed money from other loans
3. print new money
As I’m sure everyone here knows, the US sells more Treasuries than are redeemed, so that’s how they are paid. I don’t think the “national debt” is ever going to be paid back, or even reduced significantly – it’s growth will just be managed. As the Trust Fund is reduced, Special Treasuries will be replaced by marketable Treasuries. The extra supply of Treasuries could cause interest rates to go up, but the Federal Reserve can always buy Treasuries to reduce this (it already holds $2.3 trillion, with interest on these returned to the Treasury).
I don’t think the US can ever run out of money. If it spends too much more than it takes in, then interest rates or inflation can go up, but the bond markets aren’t too worried about that – 30-year bonds are at 2.3%, which is 1.8% above the 30-year TIPS rate (a measure of expected inflation).
As far as what happens if the Trust Fund runs out, Congress will have to act. It can reduce benefits to current recipients, which I think is the least likely outcome. It can transfer money from the general fund to cover the shortfall, or it can raise payroll taxes. The option to decrease benefits for future recipients, which some people currently favor, will no longer be available because it takes a considerable time to have a significant effect. So I am fine with nothing being done for now, even though I will be on Social Security when the Trust Fund is projected to run out under current law (and I plan to wait until 70 to start Social Security, in which case an across-the-board cut will affect me more than if I started earlier).
Ah yes, I see. 2015.
Well, hey Bruce, if you are paying attention, do you know the answer to my question as of now? I do not, although I should probably go figure it out, since it is “my” equation after all, :-).
Another fallacy of the Trust Fund is that it somehow secures a level of future benefits. As you point out, one of the options when it runs out is reducing benefits — an option that would not surface if Congress simply kept payroll tax at the necessary level all along.
Actually the option to reduce comes earlier: when income tax is called upon to start cashing bonds. People who pay more income tax proportionately have more power over Congress than people who pay proportionately more FICA tax — more income naturally and normally denoting more political influence.
SS exchanges the asset of a Special Treasury for the asset of principal and interest in the TF when the treasury matures (which you folks are calling being cashed – even though cash is not involved). Then, if it does not need the dollars for current benefits, it turns around and creates a new Special Treasury.
Why should I, who am discussing SS, care what what is done with the borrowed funds?