This year for the first time since 1983, Social Security will pay out more in benefits than it receives in payroll taxes and is hence running a cash-flow deficit. This is an important threshold. It was also not expected for another six years.
Some observers argue that the situation shouldn’t cause alarm. As the theory goes, when Social Security starts registering a cash deficit, the shortfall is made up by withdrawals from trust fund assets. In addition, in spite of the cash-flow deficit, the trust fund will continue to show net growth until 2023 because of the interest generated by its bonds.
In practice, however, the trust fund and interest payments it receives are simply accounting fiction. For years, the federal government has been borrowing the Social Security Trust Fund assets for its daily spending. The fund has nothing left in it except IOUs from the federal government. In fact, even the interest is paid in IOUs.
Hence, the only way Social Security will not go into the red this year and in future years is if the federal government pays back Social Security. But since the money has long ago been consumed, it must borrow money from the public or raise taxes to pay its Social Security debts.
Report: Tweaks to taxes, benefits can eliminate shortfall
Unfortunately, all great plans must eventually degenerate into action.
Social Security faces a $5.3 trillion shortfall over the next 75 years, but a new congressional report says the massive gap could be erased with only modest changes to payroll taxes and benefits. The longer action is delayed, the harder it will get to address the program's finances.
- The entire $5.3 trillion shortfall over the next 75 years would be wiped out if payroll taxes were increased by 1.1 percentage points for both workers and employers.
- It would also disappear if Congress started taxing all wages, not just those below $106,800, said the Senate report, citing projections by the actuaries at the Social Security Administration.
- On the benefits side, more than three-fourths of the shortfall would vanish if Congress reduced annual cost-of-living increases by 1 percentage point each year. Social Security recipients get annual increases based on inflation.
- About 23 percent of the shortfall would be gone if Congress gradually increased the age when retirees qualify for full benefits from 67 to 68. Nearly a third of the shortfall would disappear if the full retirement age were gradually increased to 70.
The Senate panel's report will be presented to President Barack Obama's deficit reduction commission, which is expected to review all entitlement programs in the search for savings.