It has been nearly a year of non-stop effort from Republicans to repeal or reform the Affordable Care Act (“ACA”). In response, the Democrats have sought to maintain gridlock on the issue.
As exhaustive as this battle has been, few have heard anything about the connection between the ACA and Social Security. Fewer still realize that the repeal of President Obama’s signature legislation might well trigger a crisis in FDR’s signature program.
We aren’t even discussing the possibility.
As exhaustive as this battle has been, few have heard anything about the connection between the ACA and Social Security.Brenton Smith, IVN Independent Author
A quick look to recent history reveals that the Trustees of the program decided in 2010 that the ACA legislation would generate substantially more taxable wages over the measured period.
If we repeal the laws, it only makes sense that we will unwind all those assumptions.
The Unquestioned Authority
In response to this concern, readers generally assert that they didn’t get a raise this year. Thus repealing the ACA can’t affect the program.
As regrettable as that situation might be, the Trustees’ opinion matters more to the debate about Social Security than actual results.
These higher wages exist in formulas that predict the future of the program. When someone says that Social Security will pay benefits until 2034, it is assumes that you and every one of your friends did get a raise.
A Lot of Money
We are talking about a lot of money. If we reset the forecasts to use assumptions from the pre-ACA levels, we could create a $1 trillion shortfall over night.
By comparison, it took the program nearly 70 years to build a short-fall of $6 trillion.
Change Occurs Progressively
As it is, the Trustees believe that the program has pledged $12.5 trillion in benefits which no one expects the system to pay without changes to the law. Those broken promises start in 2034 or so, and mean that beneficiaries would get about 77% of their promised benefits.
If we reset the forecasts to use assumptions from the pre-ACA levels, we could create a $1 trillion shortfall over night.Brenton Smith, IVN Independent Author
Of course, all of these outcomes assume that the ACA delivers higher wages. If it doesn’t, the negative impact will bleed into the program progressively over time. In the net, the exhaustion point may not change much but the size of the reductions would.
Making a Big Problem Smaller
False wage figures present a separate problem. They tend to mask the size of the problem because we express the system’s unfunded liability in terms of wages. It is a reasonable measure because we pay for the program with a tax on labor.
When you might see the moniker “percent of taxable wages,” the figures tell you how much we would need to raise the payroll tax in order for Social Security to pay its bills for 75 years.
Today, that figure is 2.83 percent. So if we increase payroll taxes to 18.13 (15.3+2.83), Social Security should be able to pay benefits to existing voters.
These figures lose their significance as we force magic money into the equations. The result understates the problem.
To illustrate, the Social Security shortfall in 2010 grew by roughly $100 billion. Yet, the tax remedy shrank from 2 percent to 1.92 percent because the future wages were inflated.
The Making of a Crisis
Crises don’t occur because bad things happen. Crises develop because unexpected things happen, and we tend to over-react in response.
Voters would wake to a new day that holds the news that things in Social Security are a lot worse than we have previously thought.Brenton Smith, IVN Independent Author
In terms of Social Security, the repeal of the ACA is expected. On the other hand, the cost to unwind the assumptions associated with that legislation is entirely unexpected.
Voters would wake to a new day that holds the news that things in Social Security are a lot worse than we have previously thought.
I can’t say that the price tag of resetting the forecasts of Social Security to pre-ACA levels will break the public’s will on the program. I can tell you with some degree of certainty that there is a figure where voters simply say no.
At this point, that price tag isn’t even been considered by the public.
$1 trillion is a ballpark benchmark.
Based on “Table IV.B9, Reasons for Change in the 75-Year Actuarial Balance,” the positive impact was roughly double the cost of time in nominal size. (+0.14) to (-0.06). The cost of time was roughly $400 billion (see “Highlights”). That would suggest that the impact is $930 billion
“Table VI.D4.—Sensitivity of OASDI Measures to Real-Wage Assumptions” says that if the real-wage drops from 1.2 to .58 the cost to fix the program would rise to 3.9 percent of wages. Taking us back to the pre-ACA levels would mean a real-wage differential of 1.1. That is about 16% of the way to .58. That would translate into a fix of 3.28%.
“Table VI.D4.—Sensitivity of OASDI Measures to Real-Wage Assumptions”
In the 2017, the assumptions affected by the ACA (real-wage differentials) were decreased because new projections from the Centers for Medicare and Medicaid Services suggest that employer sponsored group health insurance premiums were growing faster than expected.
In terms of the long-range estimates, the change was close to 0.01 percent even though the reported change was lost in the rounding. In total, adjustments to this assumption cost the program .03 percent of wages.
By comparison the cost of time created roughly $500 billion in unfunded liabilities or .05 percent of wages.