Update 269: In the Tax Cuts’ Wake:
Pensioners, Workers to Pay the Piper
Whether the GOP will campaign on last year’s tax cut is a central question of the midterm season. American taxpayers aren’t as enamored by this as much as similar cuts in the past. The sense has taken root, stoked by Paul Ryan and other GOP leaders, that there is no free lunch and there is no free tax cut. And that the price to pay — the fiscal bill for the multi-trillion dollar cut bill — will come from entitlements.
Is this all smoke? Or is there fire here regarding the most incendiary issue one could want in an election year? We look at the state of and the prospect for a GOP threat to entitlements this year.
Speaking of, next — the first in our series of updates on primary election results this Wednesday following tomorrow’s primaries in Indiana, North Carolina, Ohio, and West Virginia.
Tax and the Imbalancing Act
As Republicans in Congress passed a tax bill in December that greatly deepened America’s fiscal hole, those preparing for and in retirement across the country gulped, for they sensed what was coming. The resulting annual trillion dollar fiscal deficits carries acute consequences for them.
There are two crisis points in today’s retirement system: a chronic multiemployer pensions crisis and the depletion of the Social Security Disability Insurance (DI) and Old Age Survivors Insurance (OASI) Funds.
Prospects for America’s Retirees
Today, millions of America’s retirees are leaving the workforce with almost nothing in savings. 42 percent of Americans have less than $10,000 set aside for retirement. The retired are forced to spread meager savings over a longer time period, as average life expectancy has increased by 20 years since the 1930s. Seniors must also face rising costs of care to deal with failing health.
By 2035, a typical senior will spend one out of every seven dollars of retirement income on medical care, a 40 percent increase from 2012. According to the Supplemental Poverty Measure (SPM), 7.1 million adults ages 65 and older (14.5 percent) live in poverty. These figures will only worsen if Social Security and Medicare funds become solvent.
Entitlement Programs’ Financial Security
Social Security funds are stable today, but last year, the Social Security trustees projected they will not be in ten to fifteen years. Over the next decade and a half, voters concerned about their retirement have a few dates to keep in mind:
• the Disability Insurance (DI) trust fund will deplete by 2028
• the Old Age Survivors Insurance (OASI) trust fund will deplete by 2035
• combining the two funds, social security is expected to deplete in 2034
After these years, revenue would be able to pay out just 77 percent of scheduled beneficiaries. Under the Social Security Act, beneficiaries are legally entitled to their full scheduled benefits. Nevertheless, a conflicting law, the Antideficiency Act, prohibits the federal government from spending in excess of available funds – tying the Social Security Administration’s hands.
The result could mean retirees suffer from receiving benefits on a delayed basis or receiving benefits on the same schedule but at reduced levels. Since retirees are legally owed their full benefits on time, expect substantial legal action to take place.
These projections were issued just before the passage of the Tax Cuts and Jobs Act (TCJA). With the new tax law, Republicans claimed to help reduce the average person’s taxes today. What the GOP did not mention is that diminished revenues over time will exert downward pressure on the government’s ability to compensate for shortfalls in Social Security trust funds.
OASDI net cash flows as a percentage of GDP, 1957–2009, projected under the intermediate assumptions, 2010–2085; SOURCE: Social Security Administration, Office of the Chief Actuary.
Ongoing Crisis: Multiemployer Pensions
Even today, the TCJA is siphoning resources from retirees, as they are short-changed in the multiemployer pension space. Republicans have done nothing to address the issue.
Pension plans of all kinds were undermined by two financial market crashes between 2000 and 2009. Among the factors in addition to market crashes that harmed multiemployer pensions were a declining union workforce, global competition, technology, and the ratio of retirees to active participants.
PBGC’s Multiemployer Program
Multiemployer plans are meant to allow related small businesses and large companies to pool resources to provide for workers in old age. These plans are insured by the US Federal Government’s Pension Benefit Guaranty Corporation, with 10 million Americans participating in about 1300 plans.
Until 2004, the PBGC’s multiemployer insurance pool was operating with a surplus, but the 2008-2010 financial crises had a dramatic impact. Now the program is projected to become insolvent in 2025. Once its funds are depleted, the PBGC will likely only be able to pay a fraction of the (already low) guaranteed benefits – as little as 10% of original benefits for some pensioners.
There are about 100 multiemployer plans covering nearly 1 million participants deemed “critical and declining.” While this means that a majority of multiemployer plans are healthy, the entire multiemployer system is fragile, and part of the solution needs to consider how to keep all participants (the struggling and the healthy) in good shape over the long haul.
Congressional Activity on Multiemployer Pensions
• The MPRA: The Multiemployer Pension Reform Act (MPRA) of 2014 has not solved the problem. The MPRA addresses plans currently in crisis but does not help to strengthen plans or help workers prepare for the future.
• The Joint Select Committee: With pressure from Teamsters, retirees, and unions, congressional leaders passed the Bipartisan Budget Act of 2018 which created the Joint Select Committee on Solvency of Multiemployer Pension Plans to address the impending insolvency of large multiemployer defined benefit pension plans and the PBGC. The Committee is required to propose legislative language to improve solvency by November 30, 2018.
• The Butch Lewis Act (H.R. 4444/S.2147): Sen. Brown introduced this act along with Rep. Richard Neal. A few House Republicans have praised the bill as well. The Act would create the Pension Rehabilitation Administration (PRA) to lend money on very favorable terms to the troubled plans, who can show they will eventually be able to repay the loan.
With the 65+ population rising as Baby Boomers retire, Social Security burning through its funds, the PBGC depleted, and the TCJA sapping revenues across the board, the situation is becoming unmanageable. A handful of ideas could strengthen Social Security and help prevent its depletion:
• fully index benefit payments for inflation to help retirees keep up with rising costs,
• raise the $128,700 taxable maximum cap on the FICA payroll tax to raise revenue from wealthier taxpayers,
• expand compensation subject to FICA taxes to include capital gains rather than exclusively salaried income,
• create earnings credits for people who are not working because they are caring for a child or a family member and for those who work in noncovered jobs,
• implement a new minimum benefit to keep low-paid workers above the poverty level, and
• redirect OASI funds to the DI fund to prolong the life of DI to 2034.
Dealing with an entitlement crisis is not a question of if but when. With the action being taken by Congressional Republicans, the crisis has become even more imminent. Unless steps are taken to strengthen SS, we will have a lot of angry retirees and newly influential Democrats on our hands.