Social Security’s challenging financial future

Projected long-term shortfalls unless Congress takes action

BUFFALO, N.Y (WIVB) - Social Security turned 81-years old this year.

It’s a depression-era social insurance program, established in 1935, designed to protect the financial security of Americans in their old age.

The horrific effects from the Great Depression saw millions of Americans lose their jobs and savings.

Initially, the program was intended to provide temporary “relief” until more Americans were able to secure retirement income.

Social Security is a pay-as-you-go program in which today’s workers fund current retirees and disabled workers.

Last year, almost 60 million Americans received $883 billion in Social Security benefits.

“It is a stream of payments that you will get it as long as you live,” said Charles Jeszeck, director of Education Workforce and Income Security Group with the U.S. Government Accountability Office.

The GAO, which conducted a review of Social Security, is part of the legislative branch of government, known as the investigative arm of Congress.

“It’s insurance to protect you from outliving your assets so that you’re not living on the street when you’re old and unable to work,” Jeszeck said. “It’s a stream of payments that you will get as long as you live.”

But Social Security has a shaky long-term financial future if no action is taken.

According to a 2016 report by the Social Security Board of Trustees, the combined Old-Age and Survivors Insurance, and Disability Insurance Trust Funds are projected to be depleted in 2034, with about 80 percent of benefits payable at that time.

“It’s not like it’s going to disappear,” Jeszeck explained. “There’s still a lot of money. It’s just they wouldn’t be able to pay all the benefits that had been promised that people are expecting to get.”

Worker pay about 6.2 percent of their earnings into Social Security, with employers paying a matching amount.

Currently, taxed earnings are capped at $118,500.

In 2015, the combined trust funds collected $920.2 billion in revenues. Of that amount, 86.4 percent was from payroll tax contributions and reimbursements from the Treasury Department’s general fund, and 3.4 percent was from income taxes on Social Security benefits.

Interest earned on government bonds held by the trust funds, about 10 percent, provided the remaining income.

People are living longer

So, what the issue?

For one, people are living longer and that’s putting a strain on the program, financial experts point out.

In 1940, the life expectancy of a 65-year old was about 14 years; today it's about 20 years.

“When Social Security was put in place, understand this, it was designed for people to receive benefits at 65 with the expectation that half of them would die at 63,” said Anthony Ogorek, founder and chief investment officer of Ogorek Wealth Management in Williamsville.

By 2035, the number of Americans 65 and older will increase from about 48 million today to over 79 million.

“Longevity has expanded. The number of workers supporting one retiree has diminished significantly and this plan really hasn’t changed in decades,” Ogorek said.

The GAO’s Charles Jeszeck says even Congress does nothing, people would still receive most of their benefits.

“The fact is you have millions of people paying taxes and billions of dollars flowing into the trust funds,” he said. “Social Security as a program would still be there.”

But for younger individuals expected to enter the workforce in the next year or two, the prospect of Social Security asset reserves running dry at some point is a little scary.

“A lot of people are worried that we may not have a lot of funds for my generation,” said Samantha Frank, a business student at the University at Buffalo.

And she’s not the only one asking the question.

“Will there actually be any left for me when I retire?” wondered Alex Goldberg, a UB senior majoring in business.

Rep. Tom Reed (R) Corning, whose district includes the Southern Tier, says “everyone agrees” that Social Security is on the path of insolvency.

“If we don’t do anything absolutely they’re right,” said Reed, in response to concerns raised by future workers.

“It is in a path that has to be taken care of in order to protect it for generations that are going to rely upon it and need it,” he said. “You pay for the present generation and then in the future a promise has been made to you.”

According to the Social Security Administration, there are currently 2.8 covered workers for each beneficiary. By 2035, there will be 2.2 covered workers.

Issac Ehrlich, a SUNY and UB distinguished professor of economics, says social security depends on what he calls "worker-support ratio." -- the number of contributing workers per one retired beneficiary.

“Any reduction in fertility. Any reduction in family formation. And more importantly, any reduction in labor force participation is putting the system at risk,” said Ehrlich.

Ehrlich argues that Social Security did achieve its goal.

“The proportion of elderly people who were without means, or with very little means has improved dramatically.”

He says the system was balanced in terms of the ratio of contributors to beneficiaries, and that meant the program did not face any “financial hazards.”

But the situation is changing.

Ehrlich says there’s been a “massive” redistribution from the young to the old.

“Because there are less of them and there are more elderly,” he said. “And that’s going to grow; partly because of the fact that we live longer, which is a good thing. But living longer under the regime of a defined benefit Social Security system raises the financial problem.”

The bottom-line, both Social Security and Medicare, which together account for about 40 percent of federal program expenses, face long-term financing shortfalls under currently scheduled benefits and financing.

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