Monday, March 29, 2010

Social Security in Deficit; Will It Ever Rebound?

The New York Times reports that the Congressional Budget Office (CBO) projects that Social Security will run a cash deficit of around $29 billion this year, something that hadn't previously been predicted to occur until 2016. This isn't huge news, as the program was only barely in surplus this past year and the demographics aren't getting any better.

But here's one thing I wonder about: will the program ever come out of deficit again, or is this it? The CBO projects that Social Security will return to small surpluses (in blue) of $5 billion in 2014 and $4 billion in 2015, before again going into deficits—this time permanently—in 2016.

But as far as I know, the CBO's "current law" projections assume that the Bush tax cuts are repealed in their entirety when they expire at the end of 2010. If, however, the cuts are retained for low- and middle-income households—as President Obama has promised—then Social Security revenues from income taxation may be slightly reduced. This could be enough to tip the balance.

In 2014, for instance, Social Security's own actuaries predict that the program will receive around $31 billion in revenues from income taxes levied on retirement benefits. If that amount is reduced slightly, then the chances of a surplus are reduced.

In the end, the difference between a small surplus and a small deficit isn't a big deal substantively. Over the next 10 years, CBO projects that Social Security will run a total cash deficit exceeding $200 billion.

But it may be a big deal in influencing if and when Americans and their representatives in Washington come to terms with the fact that Social Security and other entitlement programs aren't going to fix themselves. As long as Social Security has been in surplus, it has been easier for policy makers to forget that fact.

Update: Marc Goldwein over at the Committee for a Responsible Federal Budget caught this first -- I'm losing my edge as I get older...

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