The Challenges Facing Social Security and the Options for Reform [Part 2/3]

            

III.  The Gap in OASDI Spending and Payroll Tax Revenue: Future Actuarial Balance

An Increase in the Number of Beneficiaries

During the next few decades, the number of beneficiaries will increase as the baby-boom generation ages and begins to leave the labor force.[1] Additionally, an increase in the life expectancy rate due to better health and medical technology, coupled with a constant birth rate will cause an increase in the number of beneficiaries and a shortfall in revenues for Social Security.[2]

·      A shrinking workforce coupled with increased enrollment — In June 2010, there were 2.8 workers per Social Security beneficiary; by 2035, the CBO projects that this will decrease to 1.9 workers per Social Security beneficiary (a decrease of 32%). Though incomes will rise as the economy expands, a rise in incomes due to technological innovation and increases in production over time will not be enough to sustain current outlays because other entitlement spending is expected to rise more than incomes do (e.g. Medicaid, Medicare).[3] Assuming no tax increases, the decrease in the ratio of worker to beneficiary will result in a decrease in future OASDI revenues.

Broken tax laws and an expected decrease in the share of earnings subject to the payroll tax

Under current law, the 6.2% payroll tax only applies to the first $113,700 of income. Additionally, in the last few decades the U.S. has experienced an increase in income inequality. By CBO and OASDI Trustees Reports estimates, the top 1% of households saw a 275% increase in income from 1979-2007, while households near the middle income levels saw only a 42$ increase in income during the same time period.[4]

·      Income inequality, the payroll tax, and the share of earnings subject to the payroll tax — Under current law, the top income earners will pay a smaller percentage of their earnings in payroll taxes over time.  If the rest of the workforce does not experience a greater increase in income levels, contributions from middle-class Americans will not rise. CBO projects that earnings inequality will increase somewhat during the next few decades and that the share of earnings subject to the payroll tax, which has averaged around 85 percent in recent years, will decline to around 83 percent in 2036.[5] Moreover, demographers and medical specialists have presented substantial evidence that wealthier Americans have higher life expectancy rate than those in the lower income levels, thus they are collecting more in lifetime Social Security benefits.

Expanding DI Rolls

The Social Security Disability Reform Act (1984) had the effect of making the disability application process much more subjective and stipulated that an individual has to have a “fatal health condition,” or must be unable to engage in “substantial gainful activity” in order to obtain DI.[6] These ultimately had the effect of expanding rolls for individuals with conditions such as depression, other mental health concerns, and even back pain. Additionally, the expansion of DI can also be attributed to an increase in the number of aging workers, and a sluggish economy in which more individuals are filing for DI. The main problem with current DI Rolls, besides the payout structure addressed below, is that there is no foolproof system for individuals to prove that they are in need of DI benefits.[7]

·      Payouts – The CBO estimates that the DI program has expanded by a factor of 6 from 1970-2007. In 2011, benefits were paid to $8.3 million individuals and expenditures increase by a factor of 9 to $128 billion.

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[1] op.cit., “October 2012, page 9.

[2] Demographers generally predict that life expectancy will continue to rise and that birth rates will remain as they are now, so scheduled outlays are projected to resume their upward trajectory around 2050, reaching

6.6 percent of GDP in 2086. CBO, October 2012, page 9.

[3] Feldstein, Harvard 2013, op.cit., CBO, June 2012, p. 12-26.

[4] Congressional Budget Office, “Trends in Distribution of Household Income Between 1979 and 2009,” October 2011. OASDI “Trustees Report: Summary 2009,” 2009.

[5] op.cit., CBO, October 2012, page 10.

[6] op.cit., Feldstein, Harvard, 2001, 2013.