I’ve been thinking about the bailout again. I’ve been busy, it makes me mad, so I write a little about it and leave it at that. Now I’m thinking about the next government emergency bailout – Social Security.
It will come up on us quickly. It will be a crisis. We may only have days to respond. Congress will be forced into immediate action. If you think $700 billion was a crap sandwich, what do you call a $6.5 trillion dollar emergency bailout? A crap Las Vegas-style buffet?
OK, so it won’t be $6.5 trillion needed tomorrow, but that is the shortfall demonstrated by the federal government as we stand today.
In late March, the Social Security Old-Age, Survivors, and Disability Insurance (OASDI) trustees released their annual report. It’s probably written by a bunch of actuaries, but I did not let that stop me from browsing the highlights. (The full Overview section is posted below.)
David C. John from the Heritage Foundation sums up this years report in 2008 Social Security Trustees Report Continues to Show the Urgent Need for Reform. Please do read his full analysis.
In net present value terms, Social Security owes $6.5 trillion more in benefits than it will receive in taxes. The 2008 number consists of $2.2 trillion to repay the special-issue bonds in the trust fund and $4.3 trillion to pay benefits after the trust fund is exhausted in 2041. While this is a decrease of $0.3 trillion from last year’s report, almost all of that change results from a change in the methodology used to make the estimate. If last year’s methodology had been used, the total deficit would have been $7.3 trillion. …
The year when Social Security begins to spend more than it takes in, 2017, is by far the most important year. From that point on, Social Security will require large and growing amounts of general revenue money in order to pay all of its promised benefits. Even though this money will technically come from cashing in the special-issue bonds in the trust fund, the money to repay them will come from other tax collections or borrowing. The billions that go into Social Security each year will make it harder to find money for other government programs or will require large and growing tax increases.
A second important year is 2010. Starting in just two years, the annual Social Security surpluses that Congress has been borrowing and spending on other programs will begin to shrink. From that point on, Congress will have to find other sources to replace the money that it borrows from Social Security or shrink spending. By 2017, Congress will have about $80 billion less to spend annually.
Here is the full overview from the trustees report.
At the end of 2007, almost 50 million people were receiving benefits: 34 million retired workers and their dependents, 6 million survivors of deceased workers, and 9 million disabled workers and their dependents. During the year an estimated 163 million people had earnings covered by Social Security and paid payroll taxes. Total benefits paid in 2007 were $585 billion. Income was $785 billion, and assets held in special issue U.S. Treasury securities grew to $2.2 trillion.
The OASI Trust Fund and the combined OASI and DI Trust Funds are adequately financed over the next 10 years under the intermediate assumptions. The DI Trust Fund is expected to remain solvent over the next 10 years, but does not satisfy the short-range test of financial adequacy because assets are estimated to fall below 100 percent of annual expenditures before the end of 2017. The combined assets of the OASI and DI Trust Funds are projected to increase from $2,238 billion at the beginning of 2008, or 359 percent of annual expenditures, to $4,273 billion at the beginning of 2017, or 385 percent of annual expenditures in that year. Combined assets were projected in last year’s report to rise to 362 percent of annual expenditures at the beginning of 2008, and 403 percent at the beginning of 2017.
Under the intermediate assumptions, OASDI cost will increase more rapidly than tax income between about 2010 and 2030 due to the retirement of the large baby-boom generation. After 2030, increases in life expectancy and the relatively low fertility rates experienced since the baby boom will continue to increase Social Security system costs relative to tax income, but more slowly. Annual cost will exceed tax income starting in 2017, at which time the annual gap will be covered with cash from redemptions of special obligations of the Treasury that make up the trust fund assets until these assets are exhausted in 2041. Separately, the DI fund is projected to be exhausted in 2025 and the OASI fund in 2042. For the 75-year projection period, the actuarial deficit is 1.70 percent of taxable payroll, 0.26 percentage point smaller than in last year’s report. The open group unfunded obligation for OASDI over the 75-year period is $4.3 trillion in present value, and is $0.4 trillion less than the measured level of a year ago. In the absence of any changes in assumptions, methods, and starting values, the unfunded obligation would have risen to almost $5.1 trillion due to the change in the valuation date.
The OASDI annual cost rate is projected to increase from 11.20 percent of taxable payroll in 2008, to 16.41 percent in 2030, and to 17.50 percent in 2082, or to a level that is 4.20 percent of taxable payroll more than the projected income rate for 2082. In last year’s report the OASDI cost for 2081 was estimated at 18.55 percent, or 5.20 percent of payroll more than the annual income rate for that year. Expressed in relation to the projected gross domestic product (GDP), OASDI cost is estimated to rise from the current level of 4.3 percent of GDP, to 6.0 percent in 2030, and then to decline to 5.8 percent in 2082.
The improvement in the long-range actuarial status of the OASDI program indicated in this report is principally the result of changes in immigration methods and assumptions. These changes resulted in substantial reductions in the projected cost of the program, particularly in the latter half of the long-range projection period.
Annual cost will begin to exceed tax income in 2017 for the combined OASDI Trust Funds, which are projected to become exhausted and thus unable to pay scheduled benefits in full on a timely basis in 2041 under the long-range intermediate assumptions. For the trust funds to remain solvent throughout the 75-year projection period, the combined payroll tax rate could be increased during the period in a manner equivalent to an immediate and permanent increase of 1.70 percentage points, benefits could be reduced during the period in a manner equivalent to an immediate and permanent reduction of 11.5 percent, general revenue transfers equivalent to $4.3 trillion in present value could be made during the period, or some combination of approaches could be adopted. Significantly larger changes would be required to maintain solvency beyond 75 years.
The projected trust fund deficits should be addressed in a timely way to allow for a gradual phasing in of the necessary changes and to provide advance notice to workers. Making adjustments sooner will allow them to be spread over more generations. Social Security plays a critical role in the lives of 50 million beneficiaries and 164 million covered workers and their families in 2008. With informed discussion, creative thinking, and timely legislative action, present and future Congresses and Presidents can ensure that Social Security continues to protect future generations.
Compared to these two dates, 2041–the year that the Social Security trust fund runs out of its special issue bonds–has little importance. Even though the end of those bonds will require a 25 percent benefit reduction, Congress would have been paying more than $300 billion a year (in 2008 dollars) to repay those bonds for about seven years by the time the trust fund runs out. Congress will have to do this through some combination of other spending cuts, new taxes, or additional borrowing. These are the same choices that Congress would face without the trust fund.
Yeah, this is one more thing to think about. Here comes more tax increases for the rich – they can afford it.
Might as well print up signs right now for the Congressional hearings on what happened to Social Security and who’s at fault for not fixing it. The entire lot of them (politicians) will have dazed and confused looks on their faces in just nine years.
Update: Ed Morrissey at Hot Air writes about Social Security and the market meltdown on Dec. 2.