April 27, 2012

Don't Look Now, But Social Security Trust Funds Are Vanishing

Veronique de Rugy

Senior Research Fellow
Summary

You had better start increasing your personal retirement savings, because Social Security is fast approaching insolvency. According to the latest Social Security Trustees' report, released Monday, the program's combined trust funds will be exhausted by 2033 -- three years earlier than last year's projection and seven years earlier than projections made in 2006.

Contact us
To speak with a scholar or learn more on this topic, visit our contact page.

This article originally appeared in The Washington Examiner

You had better start increasing your personal retirement savings, because Social Security is fast approaching insolvency. According to the latest Social Security Trustees' report, released Monday, the program's combined trust funds will be exhausted by 2033 -- three years earlier than last year's projection and seven years earlier than projections made in 2006.

This means that by 2033 Social Security benefits would have to be slashed significantly. Sounds bad, right? Well, it gets worse.

Since 2010, Social Security has been running a permanent cash-flow deficit. This means that the taxes collected for the program aren't enough to cover the benefits going to retirees. The last time this happened was at the beginning of the 1980s.

Social Security optimists will argue, this time around, that the program can draw on the $2.7 trillion in assets accumulated in its trust funds. That's why Congress created the trust funds in 1983, following the recommendations of the Greenspan Commission. In any year when the program runs a surplus, Social Security invests it in trust funds, from which benefits are paid in years when outlays exceeded payroll tax receipts.

For instance in 2011, the payroll tax brought in $691 billion to pay the $746 billion in retirement benefits. To fill the gap, Social Security drew from the trust fund balances to make payments to retirees. This system will theoretically continue until the trust fund assets are exhausted in 2033. At that point, current law dictates that benefits will be slashed to the level of payroll tax revenues. That will translate to a 25 percent benefit cut across the board.

Think about it this way. Today, monthly Social Security benefits average $1,125 per recipient. After the cut, benefits would dropped to $843.75 -- a $3,375 reduction in benefits a year..

There's another reason why these trends are alarming. For years, the federal government has used Social Security's surpluses to pay for roads, education and wars. Now that the Social Security program will be demanding its money back from the Department of Treasury on an annual basis, the government will have to borrow more and more from investors, increasing the publicly held debt at a greater pace.

Lawmakers could also cut benefits or raise taxes, but they are usually reluctant to go down these unpopular roads. Neither party has introduced a serious plan to reform Social Security, but both sides have, for two years running, supported reductions in payroll tax rates without equal benefit cuts. To pull this off, policymakers borrow yet more money and transfer it to the Social Security Trust Fund to make it appear as if tax revenue was collected. It is another unfunded promise to seniors that will be paid for by future generations.

Unfortunately, Congress has been using a similar gimmick for some time. Beneficiaries of the Earned Income Tax Credit, for example, already have their share of the payroll tax refunded to them. The Making Work Pay tax credit -- part of the stimulus bill -- did the same.

The silver lining to Social Security's new annual deficit is that it exposes the fiction that the program doesn't need reform because it is fully backed by tax contributions. This is important, because a failure to reform the program means dramatic benefits cuts in the future, even for the poorest Americans. Lawmakers have many policy options to choose from: private accounts, privatization with safety net for the poor or eligibility age hike. The only bad option is to do nothing.