Soc Sec XXXVIII: Financing Shortfall
(Erroneously put up as XXXVII)
Prior to 2004 Social Security Crisis was explained with a simple narrative: Boomers retire placing enormous strain on system, Trust Funds go bankrupt in short order, checks stop. Result? Social Security won’t be there for me.
This storyline was always nonsense, as long as payroll tax is being collected benefits would be paid out at some level. And on examination of the numbers it was clear that the result would still be better in real terms than today. But these facts flew mostly under the radar, and given that no one was actually proposing anything concrete social security supporters by and large just kept their powder dry. Until Bush declared war in November 2004.
The result was the ‘There is No Crisis’ battle of Spring & Summer 2005 with the result being a near total rout of the crisismongers. They simply were not prepared with real numbers, instead they brought rhetorical rubber knives to an economic gunfight. Faced with the reality that Trust Fund depletion was not projected until 2041, well after the peak impact of Boomer retirement, and that depletion did not in fact equate to ‘bankrupt’ or ‘flat broke’ they retreated from Crisis at Depletion to Crisis at Shortfall.
Shortfall refers to that time when Social Security receipts from payroll tax and tax on benefit falls behind cost. We should note that this doesn’t mean that total Income falls behind Cost at shortfall, interest is still accrued on the Trust Fund balances, but shortfall does mark the point that cash transfers have to be made from the General Fund to pay a portion of Social Security benefits. Crisismongers generally present this as some massive fiscal shock requiring huge tax increases or massive benefit cuts leading commenters to ask questions like this:
Movie Guy: “I’m interested in knowing, though, what we will say when it’s time for the U.S. Congress to pay back some of the borrowed monies during the next decade (based on current funding rates). Which discretionary programs will take the hit or will new taxes be applied to offset the Federal Budget shortfalls that may occur?”
Well the short answer is that it may not be necessary either to cut other discretionary programs or raise income taxes. To see why we have to start with the actual numbers in question. Which are to be found below the fold.
Social Security reports future numbers in two forms. Current dollars are the actual cash dollars needed in that future year. Constant dollars adjust that for inflation and so are the better measure for assessing relative impact. Crisismongers will always use current dollars because they are scarier, so I propose to use both.
Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2008-85 [In billions]
Table VI.F7.—Operations of the Combined OASI and DI Trust Funds, in Constant 2008 Dollars, Calendar Years 2008-85 [In billions]
These tables give annual numbers for needed transfers to or from the General Fund for the first ten years and then in five year intervals after that. Coincidentally Shortfall is projected for year ten or 2017, meaning that all these numbers represent transfers from the General Fund. Numbers are in billions.
With war costs FY 2009 deficits are projected to be about $600 billion. So adjusted for inflation amounts of just over half of current year borrowing would be needed to pay for Social Security in the years after 2032. If we make serious attempts to control General Fund spending and most importantly get overall health care costs under control, the cost of Financing Shortfall is not some crippling blow requiring massive cuts in discretionary spending, it can be financed like we have been financing General Fund deficits all along-by borrowing. Now sure as shooting someone will jump up crying ‘Current account deficit!!’. Well that may or may not be a problem going forward, because we can listen to liberal Mr. Gore or ultraconservative Mr. Pickens and find agreement that we can cut the cost of imported oil drastically over the next ten years and so automatically improving the trade deficit at the same time.
In any event nothing in these numbers suggest that Social Security in and of itself is much of a fiscal challenge. Global warming, Peak Oil, Health Care: huge problems that need immediate attention. Social Security? Not so much.
Note too that these numbers use Intermediate Cost assumptions. Under Low Cost transfers don’t start until 2023 and are much smaller. If I get time will post those numbers in comments, but if we just take 2035 as a sample and use constant dollars we can see a needed transfer of $160 billion or just about half of IC’s $313 billion.
(But what is with those $0 figures for 2045? Well I’ll leave that as an exercise for the reader. My answer will come in comments.)