The Social Security trust fund has been on a record-breaking losing streak this year. Chuck Blahous, former Deputy Director of the National Economic Council, notes that the fund has operated on a cash deficit for six months in a row — the first time that has happened in the 22 years that the fund has reported on its monthly status on line. It signals that the fund will go broke faster than anyone predicted:
Data recently made public by the Social Security Administration confirm that in October, 2009, the program reached a grim milestone: six consecutive months of operating cash deficits. This is the first time Social Security has faced this situation over the entire time period, dating back through 1987, for which SSA posts the monthly data online.
From May through October inclusive, Social Security’s outgoing payments have exceeded incoming program revenue, generated mostly by the payroll tax (with a smaller amount coming in via the taxation of benefits). When a cash-deficit situation develops during a period that the program is still technically solvent, full benefits continue to be paid. The operational deficit is effectively made up with general revenues, putting additional strain on a sagging federal budget.
The primary reason for the early arrival of Social Security’s deficits is the recession, which is depressing payroll tax revenue. The drop in employment, and its corollary effect on payroll taxes, is coinciding with a long-anticipated surge in benefit claims as the Baby Boomers begin to hit the retirement rolls. These factors have combined to accelerate Social Security’s financial difficulties relative to previous projections.
At the same time, its fund assets have increased by$42 billion. How can that be? Well, the fund’s assets are primarily IOUs from the federal government, which has used Social Security income to fund its own operations. If the government held no debt and ran in the black, this would be no problem — but if it did that, it wouldn’t need to issue IOUs, either.
This wasn’t a big problem while the cash revenues covered the outlays, or at least not a big short-term problem. The fund could pay its own obligations and the surplus could get eaten up by the federal government without causing any issues on benefits. Those days are rapidly coming to an end. If the revenues continue to fall short of the outlays, the federal government will have to start paying back the money — and that means more debt and more deficit spending.
By next year, we could be in full-blown deficits at SSA, and Blahous explains what that means:
It is too soon to tell whether the half-year of persistent monthly deficits will soon translate into full calendar years of net deficits. If these annual deficits arrive by next year as predicted in the September baseline of the Congressional Budget Office (CBO), this will be significantly sooner than either they or the Social Security Trustees have previously projected. In 2008, CBO predicted that cash surpluses would persist through 2019. The Trustees’ projections for the onset of cash deficits have since 1983 ranged from 2012-2021. Like those of other government forecasters, these projections failed to predict the depth of the recent recession. …
Seniors will continue to receive their Social Security benefit checks despite Social Security’s grim half-year of operating in the red. The early arrival of a half-year of consistent monthly deficits, however, should serve as a wake-up call that like other forms of retirement income, Social Security finances are being hit hard by the recession. The necessity of repairs to the program’s financial outlook is growing more urgent than previously supposed.
Who were the people who failed to predict the onset of crisis at SSA? Not Blahous; he and the Bush administration warned about it at least as far back as 2004, and in 2005 attempted to restructure SSA to restore some fiscal stability. The current budget director, Peter Orszag, was among those insisting that SSA would have no deficit issues for another ten years when he ran the CBO in 2007-8. He proved just as accurate this year when Orszag undersestimated the ten-year deficit projections by 44% — a mistake that missed $2.2 trillion dollars of debt.
Update: Blahous was not on the Council of Economic Advisers, as I originally wrote; he was Deputy Director of the National Economic Council.