Social Security fix gains urgency

By SmartMoney

The news that the Social Security system will pay out more in benefits this year than it receives in payroll tax receipts gave a jolt to some retirees. Earlier reports from the nonpartisan Congressional Budget Office (CBO) had projected that outlays would not exceed tax receipts until 2016.

Although the imbalance isn't expected to affect the benefits of current retirees or those nearing retirement, it does feed long-running fears about the health of the Social Security system. Some analysts say that Americans could face benefit cuts of 20% to 25% by 2037 if Congress does nothing to reform the system.

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Beyond the recent headline is the more reassuring information that the system has a surplus that will take years to deplete. Social Security maintains two trust funds -- Old-Age and Survivors Insurance and Disability Insurance -- both of which are running surpluses and expanding. Combined, the trust funds are projected to grow from $2.5 trillion in 2009 to $3.8 trillion in 2020, according to the CBO.

What's more, the CBO projects that Social Security's "primary" deficit -- a measure of the program's revenues excluding interest on those trust funds' assets -- should persist only until 2014, when employment is expected to fully recover.

Today's level of joblessness is taking a toll on Social Security's revenues. Fewer workers are contributing to the system via payroll taxes. Plus, the recession has prompted some seniors to apply for benefits earlier than they had planned to.

All told, payroll tax receipts for 2008 were down 2.5% from pre-recession estimates, according to Monique Morrissey, an economist at the Economic Policy Institute. She expects 2009 receipts may be as much as 8% to 9% below pre-recession estimates.

Even assuming an increase in employment as the economy recovers, the CBO estimates that Social Security's trust fund surpluses will be depleted by 2037. (This date and some estimates about the system's solvency could change in a few weeks when the Social Security Administration trustees issue their annual report.)

Morrissey and other retirement analysts contend that Social Security's trust funds were meant to be drained, in that their creation was driven in part by knowledge that baby boomers would eventually stop paying into the system and collect benefits. However, the significance of 2037 for younger generations remains. Without a cash cushion to fall back on, the sole source of retirees' benefits would be payroll taxes paid by those currently working.

Such a system would be problematic for younger generations, says Pamela Villarreal of the National Center for Policy Analysis. "When today's workers retire, their benefits will be paid only if the next generation of workers agrees to pay even higher taxes," she says.

So in 2037, when a surplus of payroll taxes over outlays is no longer being plowed into Social Security's trust funds, benefits would have to be cut by roughly 20%, Morrissey says, or the retirement age may have to be raised to 70 from 67.

For a dual-income family projected to receive roughly $50,000 a year in Social Security payments, a 20% reduction would reduce the annual benefit to $40,000.

Continued:  What you can do

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