Social Security Funding Crisis Next?
By Mary Johnson, Social Security Policy Analyst
You may be reeling from losses in the value of your home and retirement accounts, but just wait until the Social Security Trustees make their 2009 annual report. The Trustees are likely to announce a Social Security cash shortage could occur as early as 2011 or 2012.
Social Security’s costs this year are much higher than expected. And rolls are swelling as older workers turn to Social Security for a source of income after losing jobs. Meanwhile there’s a lot less revenue coming in due unemployment that exceeds 8%, and lower revenues due to the meltdown in real estate and retirement accounts. (Many of you are painfully aware of how investment income is used to determine the taxable portion of your Social Security benefits. A portion of that tax is earmarked for Social Security.)
Last year the Social Security Trustees estimated the date in which program costs will exceed cash revenues coming in would be 2017. But, that was based on much better economic conditions than those that are actually occurring. In 2008 the Trustees also estimated that under “bad” economic conditions, benefits would exceed revenues by the end of 2012. But actual economic conditions have turned out to be worse than bad.
Since revenues have always exceeded what was needed to pay benefits, the Social Security Trust Fund system has never faced the sort funding “test” that would occur when cash revenues begin to decline. Under current law, when Social Security taxes are received, the federal government uses them to pay benefits and any excess is used for other government spending. The government replaces the surplus taxes with non-marketable bonds or IOUs that earn interest. When program costs exceed cash revenues, benefits would be paid based on the interest earned by the bonds held by the Trust Fund, and finally the IOUs themselves would be repaid.
Although the law provides for the payment of benefits, it does not say where the cash for doing so will come from. Congress doesn’t have many choices. The money could be transferred from general federal revenues, meaning we would borrow more, or Congress may decide to raise taxes, or cut spending, and that could include benefit cuts – your COLA being a prime target!
There is no historic precedent for the large transfers of general revenues that would be required to pay Social Security benefits over a prolonged period. During past Social Security funding crises in the 1970’s and early 1980’s, the use of general revenue financing was proposed, but Congress for the most part rejected general revenues and borrowing as a source of financing for Social Security. Instead Congress raised taxes and cut benefits.
While we all anxiously watch for signs that the economy is turning around, few economists foresee rapid recovery. Let’s hope that Social Security can make it a few more years on a pay-as-we go basis. In the meantime RetireSafe is working to convince Congress to take swift action to guarantee that the benefits of today’s retirees will not be cut, that all beneficiaries receive a fair COLA that keeps up with their cost of living, and to strengthen Social Security’s financing for the future. We’re working with Congress to ensure so that the Social Security that tens of millions of retired Americans rely on today will still be here tomorrow.
2008 Social Security Trustees Report, March 25, 2008.
“Greater Transparency Needed About Potential General Revenue Financing," GAO, March 2007, GAO-07-213.