Thursday, March 26, 2009

Slowdown Slashes Social Security Surplus

I should be a headline writer. For a tabloid. In any case, this story on the Nightly Business Report featuring Chuck Blahous, Mark Warshawky and Barbara Kennelly discusses how the recession is hurting tax receipts, with the result that the Social Security surplus – which was supposed to have lasted until 2017 – is close to disappearing right now, at least temporarily. Here's a link to the report; the story begins around 2:40 into the program.

I've pasted in below data from the Social Security actuaries on program revenues and costs during February, the latest data publicly available. Total cash revenues in February were $54.41 billion, versus total outlays of $55.76 billion. Looks like the surplus is a deficit, at least for now. Both SSA and CBO project at least small surpluses over the course of the year so it's likely Social Security's finances will recover at least somewhat, but this does complicate matters for the federal budget.

The good news? At least we finally found a way to "stop the raid" on Social Security…

Trust Fund Data

March 26, 2009



February 2009
(Amounts in millions)

Description of Income, Outgo, or Assets





Employment taxes




Income from taxation of benefits




Interest on investments




Other income




Total income





Benefit payments




Administrative expenses




Transfer to Railroad Retirement




Total outgo





Assets at start of month




Net increase in fund




Assets at end of month






1. OASI refers to the Old-Age and Survivors Insurance Trust Fund, and DI refers to the Disability Insurance Trust Fund. These two funds comprise the Social Security Trust Funds.
2. The net increase in assets is total income less total outgo.
3. A table total is not necessarily equal to the sum of its rounded components.



Bruce Webb said...

Yes DI took a huge hit starting around mid-year. I did a checkup after Q3 and found huge deterioration. DI started the year at $214.9 billion and was projected under IC to end the year at $218.7 billion and under LC to end the year at $221.2 billion. On June 30th the balance was $220 billion and so well on track to beating even LC. By Aug 31st the balance was actually down to $219 billion and as noted in the post is now actually down to $214 billion.

But as the chart shows OAS is still showing a small cash surplus, all the real pain is on the DI side. I haven't seen any studies on why this should be but my theory is that there is a pool of people who could qualify for disability but stayed in the workplace at some reduced capacity either because they were earning more than their DI check would produce or were seeking to maximize their ultimate OAS check after full retirement. If such a person were laid off they might well decide to apply for DI instead of struggling to remain in the work force. Given the lag time involved in getting the typical DI claim improved this suggests that the worse is ahead for DI.

On the other hand if significant numbers of older workers are taking DI as a form of early-early retirement then the effect should be fairly temporary as those recipients transit from DI to OAS at full retirement age.

It is also important to remember that although the Trustees themselves consistently talk in terms of OASDI the two insurance programs can be addressed in isolation. Already by the release of the last Report DI was out of Short Term Actuarial Balance meaning that steps could and should have been taken to shore it up, after all it was even then projected to go into deficit by 2012. The present crisis just moved that already anticipated result up by a few years.

WilliamLarsen said...

Ah, a small surplus only if you count in the income from the trust fund. In a properly run plan, would you ever spend the tax revenues? Should not a properly run plan take what others had previously contributed and use those past contributions and the income from the past contributions to pay for current benefits and leave the current tax revenues to accumulate, earn interest and grow to pay future beneficiaries benefits?

DI has been negative cash flows for several years now when you exclude the income.

2004 $(316)
2005 $(1,941)
2006 $(3,648)
2007 $(3,535)
2008 $(11,385)

But is it really any surprise? The problem has been known for decades and exposed.

A. J. Altmeyer, Chairman
Social Security Board Before the House Ways and Means Committee November 27, 1944
“There is no question that the benefits promised under the present Federal old-age and survivors insurance system will cost far more than the 2 percent of payrolls now being collected. As I pointed out in my testimony of last year, none of the actuarial estimates which have been made on the basis of present economic conditions and other factors now clearly discernible result in a level annual cost of this insurance system of less than 4 percent of payroll.”

“Indeed, under certain assumptions the level annual cost has been estimated to be as much as 7 percent of payrolls. On the basis of a 4-percent-level annual cost it may be said that the reserve fund of this system already has a deficit of $6,600 million. On the basis of 7-percent-level annual cost it may be said that the reserve fund already has a deficit of about $16,500 million.”

Robert Ball
Commissioner of Social Security
1962 and 1973,Wrote June 2005
“When Social Security began, benefits for those nearing retirement age were much higher than could have been paid for by the contributions of those workers and their employers. This was done so that the program could begin paying meaningful benefits even though workers nearing retirement would have only a short time to contribute.”

“Instead, the impression is left that the program was sound only when 16 paid in for every one taking out. Thus, of course, when the ratio changed to 3.3 to 1, the program became “unsustainable.”

“They ignore the fact that in 1950 only about 15 percent of the elderly were eligible for benefits and that it was expected by all who were acquainted with the program that the ratio would, of course, change dramatically as a greater proportion of the elderly became beneficiaries.”

“What in fact happened is that when just about all the elderly first became eligible for Social Security benefits, about 1975, the ratio was 3.3 contributors to each beneficiary and the ratio has stayed that way for the past 30 years. As the baby boom reaches retirement age, as the administration says, the ratio is expected to drop for the long run to 2.0 or 1.9 workers to each retiree. But that is the size of the problem - a drop from 3.3 to 2 workers per retiree.”

What does this earlier than projected shortfall hold in store for SS-OASI? Actually it does little to move the last date full benefits can be paid. The Trust fund being so small in terms of liabilities and the SS-OASI surplus tax being small in comparison to the yearly cost, it may move it a couple of years earlier.

What caught me off guard was the move from 30 year Treasuries to short term treasuries. Current overall returns on the trust fund have dropped by over 50%. It will drop further as the rate stays close to 0.25%.

What does this hold in store with low Treasury rates, high inflation and wage growths of 1 to 2%? Any wage growth greater than the Treasury rate has always been a negative (actually a divergent series - SS-OASI gets worse). With inflation being higher than the treasury rate we all know that one. The perfect storm.

So for those who are under 30, why should they even pay SS-OASI taxes? What do they benefit from them?

Anonymous said...

Of course, taxes on benefits don't come in on a steady basis, so a deficit in any single month is not evidence that the program is cash-flow negative.

any idea when the Trustees report will be coming out?

Bruce Webb said...

Anon it is typically due on March 31st and I set up some links at my blog and at AB yesterday in anticipation. But a commenter made what seemed to be a well informed note that the Report would not be out to May and probably mid May. Which is actually a good thing if it allows them to update some of the Q4 2008 and possibly Q1 2009 numbers to reflect the new grimmer reality.

Bruce Webb said...

With all respect to Robert Ball the ratio does not drop to 3.3 to 2 workers per retiree, that is instead the ultimate ratio for workers to beneficiaries. The actual dependency ratio for workers to 'Aged' peaks at .403 which is more like 2.5 workers to retiree. As late as 2030 the ratio is still very close to 3 to 1 at .343
Moreover total dependency ratios (including children) peak at .852 which is substantially below the post-war peak of .946 seen immediately after the Baby Boom (1965)

As to the 16 to 1 ratio and the 15% drawing benefits these numbers only apply to benefits payable under Title 2, which is what we know as Social Security today. Many more people were collecting benefits under Social Security Title 1, a general fund welfare program more akin to modern SSI as anything.
Because the program was still in its infancy, and because it was financed by low levels of payroll taxation, the absolute value of Social Security's retirement benefits were very low. In fact, until 1951, the average value of the welfare benefits received under the old-age assistance provisions of the Act were higher than the retirement benefits received under Social Security. And there were more elderly Americans receiving old-age assistance than were receiving Social Security.

The story is not as simple as the typical "Boomers hit Social Security, Social Security goes boom" narrative would have it.

Bruce Webb said...

Actually I stopped by to give Andrew a heads up on a post that will appear on Angry Bear tomorrow and is in draft form at my blog.
It draws on Treasury's Monthly Trust Fund Reports

If you go to page 3 of each monthly report and look at the balance sheet and income statement you get the numbers used by Andrew. But if you go to page 5 you get a different balance sheet with higher numbers. The difference between the two is apparent on inspection, the version on page 3 doesn't add in 'Interest Receivable'. For OAS this figure went from $9 bn in January to $17 bn in Feb, for DI it went from $900 million to $1.7 bn. I was wondering how you could show interest earnings of only $75 million on a $2.2 trillion OAS portfolio and only $16 million on a $214 billion DI portfolio. At a nominal 5% interest those figures should have been closer to $8 billion and $800 million respectively, consistent with the $54 billion shown as year to date interest.

Well I found my answer on page five, the missing dollars were right there.

So while there is clear evidence that SS is hurting from high levels of unemployment and increasing disability claims it is not really true that OAS surpluses can be said to sinking to $500 million a month.

I would note that the Trustees have no such category in their reporting, all interest accruing being counted for the purposes of year end balances.

I understand that both Hassett and Montgomery are actually talking about cash surpluses from tax revenue but that is not what most people are going to take away from 'vanishing surplus' and 'ten years early'.