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Social Security Funding Strains to Challenge Workers, Employers

By Allen Smith  8/5/2014
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Whether in the old three-legged stool of retirement (Social Security, pensions and savings) or the new model (Social Security, 401(k) and savings), Social Security has played a key role in retirement planning for decades. As that part of the retirement equation has become wobbly, workers increasingly need to shore up the other two legs on their own.

And for those who are injured, there’s more discouraging news. A recent report shows that federal disability benefits are in even worse fiscal shape than Social Security. If disability benefits are cut as a result, employers may expect more employees to seek workers’ compensation benefits.

Social Security Disability Insurance (SSDI) is nearing trust fund depletion and automatic reductions in benefits by 19 percent, according to a July 28, 2014, report by the Social Security Administration . The administration projects that SSDI will be insolvent in 2016.

SSDI had $122.7 billion in reserves at the end of 2012, $111.2 billion in income during 2013 and $143.4 billion in costs in 2013, depleting reserves by $32.2 billion in just one year and lowering the reserves to $90.4 billion. The first year outgoing expenses exceeded income excluding interest for SSDI was 2005.

Other Funds Threatened

This is in contrast to the Old-Age and Survivors Insurance Trust Fund, which pays Social Security income (SSI) retirement benefits and had reserves at the end of 2012 of $2,609.7 billion, $743.8 in income during 2013, and $679.5 in cost in 2013 with a net gain in reserves of $64.3 billion to a total of $2,674.0 billion in reserves by the end of 2013.

While that may sound promising, as Baby Boomers start to retire and live longer, Social Security expenses are expected to exceed income in 2022. The fund is projected to be depleted in 2034 with all beneficiaries facing an immediate 23 percent across-the-board benefit cut then, absent legislation.

Medicare’s reserves dropped by $15 billion from $220.4 to $205.4 from the end of 2012 to the end of 2013. Its trust fund is expected to be depleted in 2030.

The trust fund for supplementary medical insurance—Part B, which pays for physician and outpatient services, and Part D, which covers the prescription drug benefit—had an uptick from yearend 2012 to the end of 2013 of $67.2 billion to $75.1 billion.

But overall, the picture in federally funded retirement and disability benefits looks bleak. The trustees responsible for the report said that adverse consequences of delaying corrections in both the SSI and SSDI are beginning to be felt.

“The most immediate financing threat facing either program is the impending depletion of Social Security Disability Insurance Trust Fund reserves in late 2016,” the trustees said in the report summary. “This is the closest that any of the separate trust funds has come to depletion in over two decades.”

Workforce Implications

“This news is not a surprise as projections regarding the solvency of the programs have been widely discussed,” noted Kathleen Coulombe, senior advisor, government relations, with the Society for Human Resource Management. “What this does mean is that now, more importantly than ever, individuals need to save for their retirement through other channels, as Social Security alone will not be able to provide adequate income replacement.”

She added that “the issue of Social Security reform could be on the national agenda in years to come,” pointing out that a bill (H.R. 4786) would create a commission to examine the crisis and provide recommendations. The commission would, within a year after its initial meeting, send to Congress proposed legislation for achieving solvency in the funds for a period of at least 75 years. So far the bill has only seven co-sponsors.

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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