- Market Commentary
- By Jack Ablin
- June 13, 2018
Social Security Imbalances
US policymakers are simply not long-term thinkers. The financial crisis of 2008 was the culmination of years of sweeping financial dust under the rug, as the Federal Reserve, under Alan Greenspan, goosed short-term economic growth by encouraging debt-induced spending. Every time the economy got the sniffles, the Fed lowered borrowing costs. The policy helped the economy in the short run, but years of debt-fueled consumption created a housing bubble and subsequent debt crisis.
Now, America’s “third rail” is arcing, as Washington’s short-sightedness is now afflicting Social Security. In its latest report, the Social Security Administration revealed that outflows – disability and retirement benefits – are exceeding Social Security taxes paid into the system. Based on its current projections, 2018 represents an inflection point for the Social Security system, as annual expenditures cross the $1 trillion mark.
Demographic trends will only exacerbate the problem. Social Security retirement beneficiaries, Americans aged 65 and higher, currently represent 16 per cent of the population. That share is expected to rise to 21 per cent by 2030, according to the report. Meanwhile, birth rates are declining as young people postpone having children. Social Security trustees project insolvency by 2034 if nothing is done to modify current policies.
Some options include raising the limit on which payroll taxes are levied (currently set at $128,400), reducing the cost-of-living adjustment to benefits, hiking the payroll tax rate and raising the retirement age. President Trump has vowed not to touch Social Security or Medicare benefits; meanwhile, Congress’s biggest entitlement reform proponent, House Speaker Paul Ryan, is set to step down. Failing to address the imbalances heightens the risks that the problem could spin out of control. While an increasing number of countries have accumulated sovereign wealth funds to meet their longer-term challenges, America continues to accumulate debt.