Wednesday, September 30, 2009

New paper: Social Security's Unexpected Deficits Show Urgent Need for Reform

The Heritage Foundation's David C. John has a new web memo online regarding Social Security's slip into deficits for this year:

Starting this year, Social Security will spend more in benefits than it will receive from its payroll taxes. This is somewhat unexpected as just last year, the 2009 cash surplus was predicted to be about $80 billion. Even in May of this year, the program's actuaries predicted a roughly $19 billion surplus. However, they failed to allow for the full effects of the recession, and the soaring unemployment both reduced tax collections and increased the number of workers who were forced to take early retirement.

This is very bad news for taxpayers, but worse is yet to follow. The 2009 deficit of about $10 billion will be followed by a 2010 deficit of about $9 billion. If there is a strong recovery--which is questionable at best--the program could briefly return to surpluses. But by 2016, deficits will return and continue permanently. A far more likely scenario is that Social Security will run deficits from this point on.

The Reality of the Trust Fund

These deficits do not mean that benefits will be cut, but they do increase the burden on taxpayers to pay them. On top of the $1 trillion-plus deficit predicted for this year to pay for the Obama Administration's programs, taxpayers will have to find still more money to pay Social Security's deficits. It is true that a trust fund exists that has been funded by $2.4 trillion of Social Security surpluses since 1983, but there is no real money in that trust fund.

As the Office of Management and Budget said in 2000, "These balances are available to finance future benefit payments ... only in a bookkeeping sense. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits, or other expenditures."[1]

Congress has already spent every penny of that money, and all that is left are IOUs that must be repaid by the same taxpayers who paid the extra taxes in the first place. Taxpayers, not the trust fund, will end up covering Social Security's deficits.

Massive Deficits and an Even Worse Future

This May, Social Security predicted that it would first run deficits in 2016, and after that the picture was grim. After adjusting for inflation, annual deficits were predicted to reach $68.5 billion in 2020, $170.4 billion in 2030, and $293.6 billion in 2035. Now those deficits will come much sooner than expected.

In net present value terms, Social Security owes $7.7 trillion more in benefits than it will receive in taxes. This consists of $2.4 trillion to repay the special issue bonds in the trust fund and $5.3 trillion to pay benefits after the trust fund is exhausted in 2037. In other words, Congress would have to invest $7.7 trillion today in order to have enough money to pay all of Social Security's promised benefits between 2016 and 2083. This money would be in addition to what Social Security receives during those years from its payroll taxes.

According to the 2009 Trustees Report, Social Security is projected to owe $7.4 trillion after 2083, making a perpetual deficit of $15.1 trillion. Last year's number was $13.6 trillion. This means that Social Security's total deficit continues to grow well beyond the 75-year projection period. Therefore, any reform that just eliminates deficits over the 75-year window will not be sufficient to solve the program's problems.

Many opponents of reform claim that raising payroll taxes by about 2 percent (the average percentage difference between revenues and outlays over the 75-year period) would solve Social Security's problems. The reality, however, is that the program's future deficits are projected to be large and growing, so this tax increase would still leave a huge shortfall.

Short-Term Fixes

There are three ways to fix Social Security:

  1. Reduce benefits,
  2. Increase retirement savings, and
  3. Raise taxes.

The first two will take years to have a real effect. Accounts of any size need to grow for about 20-25 years before they are large enough to pay much in the way of retirement benefits. Moreover, benefit changes are politically feasible only if current retirees and those close to retirement are not affected, which means that it would be several years before benefit changes start to take effect.

On the other hand, some prefer tax increases because they would immediately pump money into Social Security. But that band-aid would just delay the start of real long-term reform and make it much more likely that Congress would keep taking the easy way out by raising taxes.

Fix Social Security Now or Face the Consequences

Social Security's future has arrived early. After years of talk about how well-funded the program is, the reality is that never-ending deficits will eat up money that could be used for other programs or tax cuts. Despite reassuring words that these deficits are temporary, the reality is much worse. These deficits are likely to be permanent, and the only way out of this cash crunch is to fix the program.

David C. John is Senior Research Fellow in Retirement Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.


[1]Office of Management and Budget, Budget of the United States Government, Fiscal Year 2000:
Analytical Perspectives (Washington, D.C.: U.S. Government Printing Office, 1999), p. 335.


Anonymous said...

This says:
1) Social Security's scheduled benefits exceed its scheduled taxes by a whole bunch.
3) We have an urgent need to fix this mis-match.
3) The likely changes to benefits and taxes won't come in quickly enough for me.

It does not say:
4) Here's my suggestion for keeping taxes and benefits in step ....

I find this type of article really disappointing. He is one of the HF's top retirement guys and he's not willing to make a specific recommendation. Everybody is playing politics.

Arne said...

"must be repaid by the same taxpayers who paid the extra taxes in the first place"

This is a false statement. 100 percent of SS taxes are on income less than ~100K. Most of income taxes are on income >100K. The taxpayers who borrowed from SS are not the same as the taxpayers who put into the trust fund.

Andrew G. Biggs said...

lawipau: David has written about how to fix Social Security a number of times, so I think this memo had a more limited scope.

Arne: I think David used some clumsy phrasing that didn't account for the distribution all issue that you are raising. What he was trying to say, I believe, was that the Social Security trust fund isn't an asset for the government or for taxpayers as a group.

Arne said...

Now you are also making a false statement. The fact that the trust fund is a liability for taxpayers as a group does not stop it from being an asset for taxpayers as a group. Since the subset of taxpayers for which it is a liability is NOT identical to the subset for which it is an asset, the observation that the liability is of equal magnitude to the asset is next to meaningless.

The bottom line (in my opinion) is that all income tax payers, not just those over $250K, should have their taxes raised to pay off this loan.

Andrew G. Biggs said...

I disagree. "As a group" means, well, "as a group." It doesn't mean that every taxpayer faces an equal liability or any liability at all. It does mean that, as a group, they do.

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Bruce Webb said...

Buy a bond. The corporation, state or local government spends it on something and promises to pay it back with interest at some point in the future out of a projected revenue stream that may or not be dedicated to repayment of that bond. Yawn, that is an important way that corporations and jurisdictions raise money. And are accounted on the books on the basis of anticipated cash flow and not scored as a 'unfunded liability' for balanced budget calculations.

The U.S. Government being in a different relation to monetary supply are held to a different standard. The idea that states and corporations fully account for future liabilities while thos same liabilities are considered 'unfunded' when it comes to the Federal government with much more free powers ot taxation is beyond my abilities to tackle tonight.

Andrew G. Biggs said...

by your definition the idea of a program like Social Security being Adequately funded or not makes no sense. Of course the government can raise taxes, and print money ( although since Social Security benefits are paid in real terms control of monetary policy isn't of any benefit). The unfunded obligation tells you the degree to which the government will have to raise taxes in order to pay promised benefits. I'm not sure what is wrong with knowing that.

Don Meaker said...

"Noone's life or property is safe while the Legislature is in session."

The SS system as currently laid out is not sustainable. Promises were made to the American People on the basis that it was sustainable. Some day, someone will have to come to terms with the colossal lie that is the modern SS program.

All folks can do now is debate on what kind of lie it would be expedient to tell next time, and hope that the people told the last set of lies, and the set of lies before that, and before that, do not have significant memory. Or they could stop the lies, and stop the theft under color of authority that characterizes the modern welfare state in the US.