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Don’t Look Now, But There Goes the Social Security Surplus

Fri, May 22, 10:27 AM ET, by Chuck Blahous, Ph.D.

As if the Nation hadn’t enough economic difficulties, onward comes the Social Security shortfall.

Only one year ago, projections were that Social Security taxes would exceed costs by $87 billion this year.  On May 12, however, the annual Social Security Trustees’ report revealed that over three-quarters of this projected surplus was evaporating. This would leave the program with only a thin $19 billion cushion -- a mere 0.5% of its tax base -- for the year.  Next year’s surplus is expected to be even smaller.   

Whither the Social Security surplus?  The program is now being buffeted by the equivalent of a “perfect storm.”  Retirement benefit claims are surging, as long predicted, as the Baby Boomers hit the retirement rolls.   Meanwhile, the struggling economy means that payroll tax revenues are lagging severely behind previous expectations.   On top of that, disability claims have increased (as they nearly always do in a down economy), while the program is also paying out its largest COLA increase (5.8%) since 1982. 

Put these together, and poof!  There goes most of the Social Security surplus.   The Trustees now project the arrival of permanent deficits in 2016.  Worse yet, the Trustees’ supplemental analyses show that this critical date is far more likely to arrive sooner than later, and could even arrive as early as next year.

None of this should cause anxiety to current seniors.  Social Security is still solvent, and they’ll get their checks.   But it is a major headache for federal budgeteers, who now face the threat of Social Security adding to the deficit for the first time in a quarter-century, as well as the virtual certainty of needing to rapidly forge a consensus on how to fix the program’s unsustainable trajectory.

Social Security’s story is a nearly perfect illustration of why one should fix the roof while the sun is shining.  President Bush tried to do so, as did President Clinton before him.  Delay has added greatly to the costs of repair; added costs that we surely do not need in our current economic difficulties. 

For too long, we have had a “shoot the messenger” attitude toward Social Security.  Rather than heed the longstanding warnings of the Trustees, we have instead fostered a cottage industry of specious attacks on the projections.  Rarely have so many people seized an opportunity to be so spectacularly wrong.  Social Security analysts have pointed out for years that the problem was just as likely to be bigger than the Trustees projected, as it was to be smaller.  Unfortunately, we were more right than we knew. 

There is still good news in all of this.  Even with the downturn, we can fix the program without reducing benefits for current seniors.  We can even do it without raising taxes, and without causing a decline in the real value of benefits from one retiree class to the next.  But we can only do so if we act soon.

In only a few years this luxury of choice will no longer exist.  We will face a dilemma between raising taxes, imposing a real decline in benefit levels, and cutting benefits for those already in retirement.  These choices would be unpalatable at any time, and are almost unthinkable in the current economic environment.  Our window for avoiding them is closing.

The Administration’s budget advertised a “new era of responsibility.”  We cannot claim to inhabit such an era so long as politicians win office by promising not to reduce the growth in Social Security benefits, not to raise the retirement age, not to pre-fund future obligations through funded accounts, and not to raise Social Security taxes for 99% of the population.   The numbers behind such pledges never added up, and now they are even further removed from reality.

Obviously, the first priority of this Administration and of this Congress must be to restore the financial and credit markets to health, and to get the American economy moving again.  Doing so will brighten the near-term picture for Social Security and for the rest of the federal budget. 

But when the storm lets up, we need to get back up on the roof, and fix it – fast. 

Chuck Blahous is a Senior Fellow at the Hudson Institute.  He previously served as Deputy Director of the National Economic Council, and as Executive Director of the President’s Commission to Strengthen Social Security.  He is currently writing a book entitled, “Social Security: The Unfinished Work.”

This Article's Word Cloud:   Administration   Director   President   Security   Social   There   Trustees   added   arrive   behind   benefit   benefits   billion   budget   claims   costs   current   decline   difficulties   economic   economy   even   federal   have   long   nearly   next   only   program   projected   projections   raise   raising   retirement   seniors   should   still   storm   surplus   taxes   than   that   they   this   time   were   will   without   would   year

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