The Coming Raid on Social Security

Every politician in America knows that Social Security (SS) is a third rail. Any Pol who tries to mess with the country’s largest and most popular entitlement program is going to have the likes of the AARP coming after them. It’s not possible to win an election on a platform that advocates cutting back SS.

With that in mind, I find it interesting to report that a very credible source is now predicting that Obama AND Congress will take action over the next 24 months that will substantially undermine both the long and short-term health of SS. The legislative raid on SS will certainly total in the hundreds of billions, it could top $1T over the next fifteen years.

So who is this “credible source”? And just how is this raid going to happen? The source of this information is the Congressional Budget Office (CBO); the following is how it will play out:

SS consists of two different pieces. The Old Age and Survivors Insurance (OASI) and Disability Insurance (DI). Both entities have their own Trust Funds (TF). OASI has a big TF that will, in theory, allow for SS retirement benefits to be paid for another 15+ years. On the other hand, the DI fund will run completely dry during the 1stQ of 2016. By current law, the DI benefits must be cut across-the-board by 30% on the day that the DI TF is exhausted.

This would mean that 11 million people (most of whom are very sick) would get slammed from one day to the next. There is no one in D.C. who wants this to happen. I don’t think the American public wants this outcome either. So what are the fixes?

  1. Increase income taxes on +$250k of income to pay for the DI shortfall. Maybe, but this will not happen with the current Republican controlled House.
  2. Increase Payroll taxes to cover the DI shortfall. I see zero political support for a permanent Payroll tax increase.
  3. Cut benefits by 30%. This would be insane – it will not happen with Obama running the show.
  4. Kick the can down the road and raid the OASI TF for the annual shortfalls at DI.

Of course #4 is the path that will be taken. #s 1, 2 and 3 are not politically feasible. I have been wondering what will happen with the DI conundrum. I was surprised to see that the CBO spelled out what will happen in its report on the Budget and Economy – SS Trust Funds. The report has this footnote:

CBO projects that the DI trust fund will be exhausted during fiscal year 2016. Under current law, the Commissioner of Social Security may not pay benefits in excess of the available balances in a trust fund, borrow money for a trust fund, or transfer money from one trust fund to another. However, following rules in the Deficit Control Act of 1985 (section 257(b)), CBO’s baseline assumes that the Commissioner will pay DI benefits in full even after the trust fund is exhausted.

The “loophole” to drain the OASI insurance is already law – so Congress doesn’t have to do anything to raid the retirement fund. The “do nothing” plan is always the best option in D.C.

The footnote goes on to provide an estimate for the size of the raid:

For illustrative purposes, below are the cumulative shortfalls in the DI trust fund beginning in 2016. Those shortfalls do not include interest expenses.

DI Trust Fund Cumulative Shortfall

($s in Billions)

2016 -15

2017 -55

2018 -94

2019 -133

2020 -173

2021 -215

2022 -260

2023 -307

Wow! At this rate the raid tops $1T in 2029. This is is a big dent in a Trust Fund of $2.8T.

There is an import “tell” from the CBO. In the footnotes it highlights the fact that there is a discrepancy, and uses this an excuse to avoid establishing an adjusted end date for the OASI Trust Fund. (It’s not a complicated calculation)

What the CBO fails to state is that the raid on OASI will result in a significant reduction in the End Date for the retirement Fund. In its report to Congress last year SS forecast that the Retirement fund would be exhausted in 2033. The DI drain (and other negative revisions by CBO) will bring the End Date to below 2030 in the upcoming SS report to Congress. That would be a very significant development. The CBO does not want to be the one who puts a new SS end date “out there”. To me, this was a cop-out by the CBO.

Given that discrepancy between the trust funds’ operation and the baseline’s assumption, CBO is not providing DI or combined trust fund totals for the year of exhaustion and thereafter.

The timing of this story is interesting. I’m as sure as I can be that the DI fund WILL NOT be exhausted in November of 2015 (it will come 2-3 months after the election). The question in my mind is will the “fix” come before or after the bi-election. If Obama was a gambler, and he believed the Democrats could re-take the House in 2015, then he might defer action on DI until 2016. This scenario creates the opportunity for option #1, a tax on the rich to supplement DI. Of course that is gambling, and there would be a very small window of time to push through a new income tax to save DI.

Then there is the Republicans. Do they want to push this before, or after 11/2015? I could argue both ways, but in the end, it gets back to the fact that no one wants to “do” anything with SS. It’s better to do “nothing”; that makes #4 the most likely outcome.

I hope that some of the big Defenders of SS pick up on the information from the CBO regarding the coming raid on the retirement fund. This is a huge constituency (60m beneficiaries – 150m contributors – every politician in the country – all of the Press). If that group catches on to what is about to happen to the retirement fund, there will be a great chorus of, “Don’t you dare touch my money!”

I’m trying to stir the pot on this one. I want DI’s terminal condition to come onto the table sooner versus later. I’m hoping that if and when it does come up for discussion, it opens the door on the broader issue of what the hell America is doing with entitlements. Basically, I’m trying to pick a big fight. For the good of the country, wish me luck.

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About Bruce Krasting 208 Articles

Bruce worked on Wall Street for twenty five years, he has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work.

From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. He closed the fund and retired in 1995. Bruce also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp.

Bruce holds a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY.

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3 Comments on The Coming Raid on Social Security

  1. Please stop calling SS an entitlement program. If you insist on it being an entitlement just send me a check for every damn dime I have put into this program. That I am entitled to. I don’t care if I get a nickle more than what I have put in. I would just like it in one lump sum. Thank you!

  2. Why is it that the only way the Dems can visualize balancing the budget is by increasing taxes. What is wrong with getting rid of 12 million illegal aliens that do nothing but soak up funds in welfare, education, incarceration, medicine, etc. Allow some to come back as agricultural labor but get rid of the rest with all their expenses.

    Cut our foreign aid. I believe we spend more on Haiti than we do on many of our own problems. Israel has fed off our free treasury tit since their inception. It was deemed proper to help them out when they first became a nation in the 40’s but this has gone into the incredible. We didn’t take them to raise, cut off their funds and military aid, save out treasury a ton and cause peace to break out in the middle East Not only Haiti and Israel but all the rest of the blood-suckers on the globe.

    Get rid of the Fed and save billions. Further, we’ll be in control of our own finances vs global bankers that have done very well, thank you, in controlling our monetary policies. Ron Paul had it exactly right!

    Follow the Constitution on all matters, but pertinent to this argument to cut back the size of government to what it was in the original document. Why do we have a Federal dept of Education, of Agriculture, of all the tag alongs that have come along since our founding. They should all be under the jurisdiction of the respective states per the 10th Amendment.

    We need to go back to tariffs and duties and excise taxes as an additional means of income. Further, we need to cut taxes on sales so as to free up the incomes of small retailers to get more money into the economy and enhance job benefits for hundreds of our citizens.

    There are multiple ways to cut back expenses and balance our budget without the constant call for tax increases. We need some responsibility in Washington to take control of our financial situation and attempt something other than the constant drone to raise taxes.

  3. I beg to differ-there are (I would guess) thousands or more people on DI that could be working-in fact-they are working and drawing DI!! We need to limit the years a person can remain on DI-period. I know people with cancer, sever back problems, and many other illnesses that keep right on working. When druggies, bi-polar (what a joke), alcoholics, and just plain laziness can stay on DI for years-there is a problem. Leave the old people alone that have worked and paid into the system most of their lives. I have paid into SS for years and will not get a penny of it because I went to work under a state retirement. Where is my money going? Wish I had a say so-it sure wouldn’t go to some of these DI lifers.

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