This week on Facing the Future we discussed Social Security reform with Jason Fichtner, former chief economist and acting deputy commissioner of the Social Security Administration. Currently, Fichtner is executive director of the Limra Retirement Income Institute.
With Social Security’s Old Age and Survivors Insurance Trust Fund (OASI) projected to be depleted by 2032, prompt action must be taken to avoid sudden benefit cuts of 23 percent.
Fichtner said the need for action is driven by demographics and finances. “We are in the Peak 65 Zone, which is basically through 2027,” he explained, meaning that 11,200 people are turning 65 every day. “That’s 4.1 million per year and people are living longer, so according to the Social Security Administration, about 1 in 3 65-year-olds today will live until at least age 90. And 1 in 7 will live to age 95,” Fichtner observed. “We’re trying to finance 25 to 30 years of retirement on a Social Security system that wasn’t based on that.”
Fichtner explained what would happen if Congress fails to take actions to avoid trust fund depletion. “By law,” he said, “Social Security cannot borrow money or raise its own revenue outside the payroll taxes. And by law, it can only pay out in benefits what it has in revenues, which includes payroll taxes and the trust fund. So, at trust fund depletion, if no legislative action is taken, then by law there’s a benefit reduction automatically. The actuaries estimate that if we get to trust fund depletion, Social Security would only be able to pay about 77 percent of what are promised benefits. That means everyone would get an across-the-board 23 percent benefit reduction overnight.
Fichtner noted that certain myths regarding why the trust funds are facing depletion can get in the way of action. Two such myths are that trust fund money was “stolen” by politicians and that the program is being drained by payments to illegal immigrants. Neither is true.
As Fichtner explained, “Social Security Treasury assets are real assets. We’re paying them, and so long as they’re being paid then they’re not being stolen. Trust fund accounting and unified government accounting say that money coming in has to be used for money going out. Any difference then is borrowed or put down as a surplus. So, basically, by having a surplus in Social Security, we were able to borrow less from the private sector. Now that’s reversed. If Congress passes a law that says, ‘You know what? Those trust fund assets, we’re just gonna tear them up,’ then they would have stolen the money. But right now, as long as we’re redeeming it, there’s nothing being stolen.”
Regarding illegal immigrants and Social Security, Fichtner said, “The politics behind this are tricky, but from a mathematical standpoint, illegal immigrants do not get Social Security benefits.” Moreover, he noted that “a lot of immigrants who come over legally don’t stay here. They pay into the program, go back to their home country, and often don’t get benefits. So it ends up being a net plus to the US, thank you very much.”
As for illegal immigrants, Fichtner continued, “some of them come here and work illegally, but still have payroll taxes collected. They are paying into a system which they won’t get a benefit from unless they become legal citizens and then can prove they paid in. The Trustees try to be very nuanced about this, but immigration – legal and other than legal – actually is beneficial for trust fund finances. That does not make illegal immigration correct, it does not make it right, it just means we need to not do scare attacks about Social Security when thinking about immigration policy.”
Fichtner believes that a new Social Security commission could help bring about needed reforms. “I don’t think Congress can act on its own,” he said. “Congress’s big incentives are to get re-elected so you can either do a commission for Social Security, or you can have term limits.”
A model he favors is the Base Realignment and Closure Commission (BRAC) from the 1990s. “The BRAC commission was good because experts talked about how to close military bases around the country,” he said. “No member wants to vote against a base in their district, so the BRAC got together and said to Congress, ‘here’s our recommendation. You must have an up or down vote. No putting it off.’ I think when it comes to Social Security, you have to do the same thing.”
In Fichtner’s vision, “A BRAC-style commission would have people come together very transparently, have open hearings, go around the country, talk to people, get people’s opinions, and come up with recommendations for Social Security solvency and then force Congress to vote on it. If they vote it down, you’re back to square one. But this gives Congress some ability to say, look, we had to vote for it, it was this or nothing, and nothing meant a 23 percent benefit cut overnight for beneficiaries. That’s the default. Taxes are not the default. A benefit cut is the default. So I think a BRAC-style commission could work and could force action.”
Hear more on Facing the Future. Concord Coalition Senior Advisor Bob Bixby hosts the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as The Concord Coalition team discusses issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.
