Monday, December 7, 2009

Chuck Blahous: Social Security deficits into 6th month

Over at e21, the Hudson Institute's Chuck Blahous points out that Social Security's cash deficits, which began in May, have now continued for six months. This makes the chances of a strong revival in program cash flows less likely.

Data recently made public by the Social Security Administration confirm that in October, 2009, the program reached a grim milestone:  six consecutive months of operating cash deficits.  This is the first time Social Security has faced this situation over the entire time period, dating back through 1987, for which SSA posts the monthly data online.

From May through October inclusive, Social Security's outgoing payments have exceeded incoming program revenue, generated mostly by the payroll tax (with a smaller amount coming in via the taxation of benefits).  When a cash-deficit situation develops during a period that the program is still technically solvent, full benefits continue to be paid.  The operational deficit is effectively made up with general revenues, putting additional strain on a sagging federal budget.

The primary reason for the early arrival of Social Security's deficits is the recession, which is depressing payroll tax revenue.  The drop in employment, and its corollary effect on payroll taxes, is coinciding with a long-anticipated surge in benefit claims as the Baby Boomers begin to hit the retirement rolls.  These factors have combined to accelerate Social Security's financial difficulties relative to previous projections.

You can track Social Security's month-to-month finances at SSA's website here.


robinchollaway said...

Great minds think alike........................................

Arne said...

But if I go look at the data (thankyou for the link), I find that SS was in surplus during June. There is even a note indicating that income is seasonal with peaks in June and December, leading us to expect that it will show a surplus again in December. Any reporting period less than a full year is not particularly informative.

Arne said...

Look at the second chart at the above link. Anyone complaining that the underlying data shows a deficit is engaging in some serious cherry-picking.

Andrew G. Biggs said...

Blahous's post refers to "six consecutive months of operating cash deficits." As many have argued, cash flows matter more than trust fund balances, which I believe is what you're pointing to. Both matter, for various reasons, but cash flows are a good measure of the program's balance of revenues and outlays.

Arne said...

Clearly I should have read the article all the way before complaining. The author was actually clear about not including the interest payments (June and Dec), so the cherry-picking was of a different type.

The trust fund is performing its primary function - providing a buffer in a time when net costs are higher than expected.

Bruce Webb said...

Well Arne is far more right than wrong.

OAS ran a small operating surplus in June ($55.1-$53.6) which combined with a continuing deficit for DI starting back in 2006 lead to a combined operating deficit for OASDI of $227 million. Of course 10% unemployment hurts and even without that fact fixing DI is the right thing to do. In fact it should have been fixed when it first fell out of Short Term Actuarial Balance. In fact Arne is credited as a co-author of the Northwest Plan which would increase the portion of FICA devoted to DI by 0.2% in 2010 and 0.1% in 2011 and with a final 0.2% in 2041 would put DI back in Long Term Actuarial Balance even as it returns combined OASDI into primary surplus.

Blahous has combined a pre-existing condition (DI shortfalls) with a hopefully temporary dip in OAS revenues due to 10% unemployment and suggests we put the patient (OASDI) on a death watch.

Chuck can play all the games he wants but in the face of the most severed downturn in employment in 30 years Social Security still ended FY 2009 with a $19.5 billion primary surplus and a $137 billion surplus overall.

DI is running down its TF balance and at the end of the FY only had a TF ratio of 183. Big deal, that is exactly what the TF is for and the world didn't stop when Treasury started having to borrow to make up the difference.

BTW it would be easier to fact check Blahous if his links were live. What I found was the August CBO update: which show a total deterioration in long term outlook after 2025 of "just 0.1% larger, on average, than in last year's projections". (App A). Blahous's formulation would lead the unwary to believe that a continuous pattern of deficits after 2019 had been moved up to 2009 while omitting the projection that would show cash surpluses resuming for some years in between. Really this is the same non-story as it was in March with "Vanishing Surplus", an exploitation of the fact that interest and tax on benefits are credited to the TF on a cyclical basis meaning that 8 out of every 12 months will score under the annual baseline while June and Dec show large peaks.

And I am not impressed with a graph that doesn't show the last two months of 2008 and so conveniently does include the anticipated December peak, which because it depends on interest on the overall TF balance is not much effected by current year tax revenue shortfalls.