Social Security & Insolvency – What Does It Actually Mean?
Jeff Szymanski works in political communications at The Association of Mature American Citizens. He wrote this piece in an effort to explain insolvency with an easy to understand example.
Insolvency
“The inability to pay one’s debts” is the dictionary definition of insolvency. So, when The Social Security Trustees report that Social Security will be insolvent in 2034, what does that mean? Let’s begin with good news. Social Security is not going bankrupt. Commentators and elected officials occasionally use the term “bankrupt” when they really mean “insolvent.” Consider this analogy.
A Family Example
A gainfully employed, married couple in their 50s enjoy eating out, taking vacations, and driving newer cars. Their mortgage was just paid off. Fast forward to age 63 when both retire. Their income is now halved—Social Security check and one small pension. The couple decide to continue spending at levels just as if they were drawing their full salaries.
Note, yearly spending now exceeds income. This can continue for a time as they draw down savings and use other resources available. At some point, though, resources will be exhausted.
At that point, the retired couple would only be able to spend commensurate with income, not a dollar more. It would likely be quite shocking to suddenly have to cut expenses by a draconian 50% each month and year going forward.
Social Security and 2034
The Trustees reported the program ran a deficit in 2018 for the first time since 1982. Full benefits continue because surpluses from past years are being used, similar to the couple using savings to keep their spending at pre-retirement levels.
The Trustees note all surpluses will be exhausted in 2034, earlier with a recession. What then? By law, Social Security can only pay benefits commensurate with payroll tax revenue collected, so beneficiaries will receive just 79% of their promised benefit. The 21% cuts kick in automatically without debate or vote.
One would think Congress would seek to fix this now rather than wait for insolvency. Just as with the couple, if spending were altered slightly right after retirement, they too would have staved off insolvency. Congress’s lack of interest is disconcerting. Neither political party suggests reform, lest the other capitalize with, “look, they’re cutting your Social Security.” Saying “Social Security must be preserved” is meaningless and unhelpful. Each passing year makes reform more difficult and painful.
AMAC’s Plan
AMAC’s Social Security Guarantee takes a measured approach that is balanced and fair. One facet is a gradual setback in the retirement age. In 84 years the full retirement age was increased once and by only two years, despite a 20-year increase in life expectancy. AMAC’s plan retains age 62 early retirement for those that need to exit the workforce then but gradually increases the full retirement age by two years without affecting those collecting or close to collecting benefits. This is a major step toward achieving solvency.
Other changes include a tiered COLA, preserving benefits for the lowest income recipients, and a slight change in the benefit formula for highest earners. We have endorsed other proposals eliminated from this plan to give it the best chance of achieving bi-partisan support. AMAC favors eliminating or recalculating the Windfall Elimination Provision. We also favor eliminating, or at least reducing “double taxation” of benefits and eliminating the “penalty” on work known as the retirement earnings test.
Doing nothing equates to 21% across the board cuts for all in over a decade. Politicians who ignore Social Security or say “it’s off the table” are shortchanging current and future beneficiaries for short-term political gain. Time is running out. People are living longer, and families are having fewer children. Politicians have known about changing demographics for decades and chose inaction. Each passing year makes reform more difficult and potentially painful.
AMAC members have noted in polls they want Social Security preserved. Solid majorities favor both increasing the retirement age and a guaranteed cost of living increase (no more zero COLA years).
To learn more about AMAC’s Social Security Guarantee, including our Social Security PLUS plan, visit https://amac.us/social-security/