If you're in your mid-40s, you should expect an unpleasant retirement surprise from Uncle Sam.
The Social Security trust fund is scheduled to run out of money in 2033, about when today's 40-something workers hit retirement age. When that day arrives, all Social Security checks would have to be reduced by about 25 percent.
For most retirees, that's a doomsday scenario. A 25 percent cut would leave them unable to pay their everyday bills.
Unfortunately, doomsday keeps drawing closer. As recently as 2005, the Social Security trustees thought insolvency was 47 years in the future. Their latest report, issued last week, moved it up 3 years, and it's now just 22 years away.
The recession, which caused a drop in payroll tax revenue and forced some people to retire earlier than they had planned, played a major role in eroding the system's finances. In the past year, the trustees said, workers' hours – and thus the taxes they paid – didn't grow as fast as had been projected.
If the job market remains weak for a couple more years – which wouldn't surprise a lot of economists – we'll keep moving closer to Social Security's moment of crisis.
Congress, however, doesn't seem to feel the urgency. As has been said often, some relatively small tweaks now could make it solvent for 75 years or more. Plenty of reasonable fixes have been proposed, but all of them can be labeled as a combination of tax increases and benefit cuts.
Republicans balk at tax increases, and Democrats refuse to accept benefit cuts, so nothing gets done.
The Simpson-Bowles deficit cutting plan of 2010, for instance, proposed gradually raising the full retirement age from 67 to 69 and the early retirement age from 62 to 64. It also would have increased the amount of income that is subject to payroll taxes, and made future inflation adjustments less generous.
It also would have made Social Security more progressive, making steeper cuts for wealthier retirees while protecting the poor. Simpson-Bowles was a sensible package, but it was pronounced dead on arrival. Congress would rather risk long-term calamity than make some politically unpopular choices.
The trustees' report contains some good arguments for acting soon. For one thing, the disability portion of the trust fund is headed for exhaustion in 2016. Congress can address that insolvency by moving money from the old-age fund, but it may as well look for a comprehensive solution instead of a Band-Aid.
The report also makes clear that the necessary combination of benefit cuts and tax increases will be about 50 percent larger if we wait 20 years to address the problem.
How do we convince Congress to make those relatively small tweaks now? Josh Gordon, policy director at the bipartisan Concord Coalition, thinks the debate should focus on Social Security's negative cash flow instead of on a faraway insolvency date.
Social Security added $45 billion to the deficit last year, and that amount will rise sharply by the end of this decade as Baby Boomers retire. “It really is a federal budget urgency,” Gordon said. “If we wait 20 or 30 years to make changes, there will be too much debt growth.”
Perhaps we need a law that would divert all congressional salaries and benefits into the Social Security trust fund when it becomes insolvent. It wouldn't be enough to solve the problem, but might be enough to spur action.