Trustees report on Social Security system a mix of good, bad news

Everyone knows that Social Security needs fixing, but Everyone knows that Social Security needs fixing, but few are willing to tell voters the bitter truth: The system will change and either some of you will pay more in taxes, or some will see reduced benefits, or there will be some combination of those two options. Photo Credit: iStock

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Just in time for the 79th anniversary of Social Security comes "The 2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds," with the current and projected financial status of the trust funds.

The report contained some optimistic parts, but also some scary realities for programs that account for about 40 percent of federal spending.

The good news is that the economic recovery, and the associated increase in tax revenue to the government, has helped improve the financial health of the massive system -- which includes retirement and disability benefits, as well as Medicare, the nation's health care coverage for seniors.

The bad news, according to the trustees, is "Neither Medicare nor Social Security can sustain projected long-run program costs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers."

Before diving into the numbers, here's a primer on the system itself. Social Security is a pay-as-you-go system, which is funded by payroll taxes (that's the FICA line item you see on your pay stub). In 1977, Congress enacted a change in Social Security, whereby a planned 2011 rate hike became effective in 1990. As a result of the change, the government received more money from taxes than was necessary to fund the Social Security obligations, creating a surplus.

With aging baby boomers tapping the system, those surpluses are now shrinking. In 2013, Social Security's cost exceeded the combined program's tax income and also continued to exceed its noninterest income. However, despite having to dip into the funds, the combined trust funds' assets are now $2.76 trillion and should keep growing through 2019.

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In the third decade of the century, things get a little tricky. According to the trustees report, the Social Security Trust Fund will be depleted in 2033 and Medicare will continue paying full hospital benefits for its elderly or disabled clients without any changes in the law through 2030.

The more urgent problem is with the nation's disability benefits program. The report projects it will be able to pay only 81 percent of benefits starting in late 2016 unless Congress intervenes. Nearly 11 million Americans collected a total of $140 billion in Social Security disability benefits last year, up from 7.9 million people collecting $78.2 billion in 2004.

Although the two main trust funds eventually will be exhausted, there will still be millions of Americans paying into the system. After 2033, the annual revenue from taxes will still be enough to cover 75 percent of future costs, so the system is not really "broke," though it is clearly broken.

The problem is that fixing the problem requires some unsavory legislative decisions. Given that lawmakers can barely get together to prevent the country from going over fiscal cliffs, the idea that they would proactively address problems that are set to occur two decades in the future seems pie in the sky.

The report tried scolding lawmakers into action, stating, "For the past several years, the annual Trustees Reports have warned lawmakers and the public of the financing shortfalls facing the Social Security and Medicare programs, emphasizing that continued delay in legislating corrective measures is likely to make the challenge ever more difficult to resolve and result in undesirable consequences." Fat chance with that line of reasoning!

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Everyone knows that Social Security needs fixing, but few are willing to tell voters the bitter truth: The system will change and either some of you will pay more in taxes, or some will see reduced benefits, or there will be some combination of those two options.

Still, the trustees note, "the adverse consequences of delaying necessary corrections in both programs are beginning to be realized. . . . Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare."

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