Social Security: The Future Arrived Early

America's labor market is in the middle of a historical crisis. Long-term and youth unemployment are at unprecedented levels, while so many men have lost their jobs that women now account for the majority of employed Americans. The stubbornly high unemployment rates have devastated the US housing market and consumer spending. Now the long-term damage to America's public social safety net and trust funds is becoming increasingly clear.

Both the Old-Age and Survivors Insurance (OASI), Disability Insurance (DI) and Hospital Insurance (HI) trust funds are supported almost exclusively by payroll tax income (they also get some interest income from their nominal holdings of US Treasury Bills and some of the tax income from benefit payments). Their built-in long-term sustainability problems are well known.¹ The severity of the labor market crisis, with its lost jobs and reduced working hours, has dramatically cut trust fund income and driven many Americans to seek disability pensions. These factors have dramatically advanced the day of reckoning.

The latest precrisis trustee report from mid-2009, which was based on what turned out to be overly optimistic projections about the current recession, had already painted a gloomier picture than in earlier years. The key dates for the trust funds were the following:

Net cash flow for Social Security (OASI) was then estimated to turn negative in 2017, while for the smaller DI and HI funds separately, this has already occurred. The (OASI) Social Security Trust Fund alone was projected to be exhausted in 2039, while the smaller DI and HI funds much sooner in 2020 and 2017 respectively.

Now it is clear that these projections were far too optimistic. The Congressional Budget Office (CBO) projects that the combined OASDI Trust Fund cash flow will turn negative THIS YEAR—in 2010—rather than 2016.

The CBO did not immediately release separate longer-term estimates for Social Security or estimates for the DI and HI trust funds. However, bringing forward the "negative net cash flow date" by a full six years is a very dramatic deterioration, implying a similar size deterioration the other trust funds. Accordingly, the latter two might be very close to exhaustion in just a couple of years.

In short, the crisis has just gotten a lot bigger and the time for Congress to fix these problems has just gotten a whole lot shorter.

Ironically this is a good thing for America. These types of problems are never dealt with politically unless the president and Congress have to. Now they do. Just as in 1982–83, when exhaustion of the Social Security Trust Fund prompted a bipartisan rescue program, this is a crisis that Congress cannot afford to ignore.

To understand why an urgent fix is needed, consider what happens when the OASI trust fund is empty in 2037. Such a development would force Social Security payments to be paid out after that date only as payroll tax income is paid in. This would imply an estimated immediate reduction in annual paid out benefits of 25 to 30 percent. If this were to happen, the OASI trust fund would remain "solvent" so to speak in perpetuity after 2037, but only through significantly reduced benefit levels.

In theory, retirees would be able to receive full Social Security benefits until the very day of exhaustion. In other words, if you died in December 2036, you would never feel any adverse impact of the imminent crisis. These numbers suggest why those who will most likely be dead by 2037 have had little incentive to act now. Inaction would leave the entire cost of reform to the generations of Social Security recipients after 2037.

Who are these people who can afford now to avoid action? The baby boomers, of course! Those born between 1946 and 1964 will mostly be gone by the time the Social Security System finally runs out of money.

Therefore, you can see the latest numbers as a gift to future generations of Americans that the predictable and inevitable crisis of Social Security has moved a lot closer, lengthening the odds of an earlier solution—one in which the cost will be spread across more generations of Americans.

Jacob Funk Kirkegaard, Research Fellow, is coauthor of US Pension Reform: Lessons from Other Countries.

Note

1. The 1982 Social Security Reform explicitly did not want to "fix" the trust fund finances in perpetuity, in order to avoid making decisions for future generations. As such, it was known from the beginning that without additional reforms (or unexpected dramatic improvements in underlying economic and demographic fundamentals), a sustainability crisis would begin  around 2040.