Are Social Security Surpluses Gone for Good?
Along with their analysis of the President's Budget, on Friday, CBO updated its Social Security projections. And as it turns out, the surpluses are now a thing of the past.
For the last two decades, the Social Security system has brought in significantly more revenue (mainly through the payroll tax) than it has spent on benefits. These resulting surpluses have been used to subsidize other parts of the budget, and then credited to the Social Security trust fund.
And as recently as 2008, these surpluses were projected to continue for a decade, before turning to deficits. At that time, CBO estimated surpluses of $700 billion between 2009 and 2018. A year later, CBO projected these surpluses to be only $80 billion. And in its latest projections, CBO estimates cumulative deficits of $100 billion between 2009 and 2018 (and another $130 billion in the next two years, alone).
The economic crisis is the key cause of these downward revisions, since lower wages and employment have reduced payroll tax revenue, and have forced more seniors into taking retirement.
As shown in the chart above, CBO projects a Social Security deficit of $29 billion in 2010, which will decline through 2014, before rising to $77 billion by 2020. Technically, CBO projects small surpluses in 2014 and 2015. However, it is bound by the "current law" assumption that all the 2001/2003 tax will expire. Should the majority of them be renewed (which is highly likely), less revenue will be brought in through taxation of Social Security benefits; and although this only makes up a small portion of the system's funding, the difference will likely be enough to keep the system in deficit.
When the system runs deficits, the difference is financed through general revenue, which essentially "pays back" the money lent to it from previous surpluses, and accounted for through the Social Security trust fund. The trust fund is projected to stand at about $3.6 trillion in 2018 (two years ago, it was projected to stand at $4.5 trillion).
As deficits continue to grow -- and they will continue to grow -- the trust fund will eventually run dry. At that point, full benefits will not be payable -- and seniors would likely see an immediate 25-30% cut in their benefits.
Policy makers should therefore be debating ways to avert this -- through benefit reductions, tax increases, changes to the retirement age, or other means. Instead, they are trying to find ways to give seniors additional benefits to make up for there being no Cost of Living Adjustment (COLA) this year -- even though there was no actual increase in prices (in other words, cost of living did not increase!).
With Social Security deficits as far as the eye can see, and a broader (and larger) government debt crisis just around the corner, it is time for policymakers to start enacting some real reforms. We just hope Washington is up to the task.