No Need for Social Security Fright on This Halloween

October 31, 2011 at 5:21 pm

The Washington Post says that because Social Security will pay out more in benefits this year than it collects in payroll taxes, the program has gone “cash negative” and will add $46 billion to the deficit in 2011.  This claim, which we’ve dealt with before, ignores a huge source of income to Social Security — interest on its portfolio of Treasury bonds — to make it sound like the program faces imminent crisis.

It doesn’t.

Social Security’s interest earnings on its holdings amassed over the decades are expected to bring in $115 billion this year (as the trust fund reaches $2.7 trillion), leading the program overall to run a $69 billion surplus — not a deficit.  Those funds are invested in U.S. Treasuries, which (as my colleague Paul Van de Water notes) are regarded as the world’s safest investments.

The story’s heading, “Payroll tax holiday depriving Social Security of revenue,”  isn’t correct, either.  The temporary payroll tax cut that Congress enacted last December to help support consumer spending in the face of a weak economy  — and that President Obama proposes to extend — is being financed from general revenues, not Social Security.

The economic downturn has taken a toll on Social Security, by depressing payroll-tax revenues and leading some older workers who can’t find jobs to file for retirement or disability benefits.  The graying of America’s population adds to the program’s challenges, though policymakers have anticipated that demographic shift for decades.  In fact, the drafters of the 1983 Social Security reform law built up the trust fund in order to pre-fund some of the costs of the baby boomers’ retirement.

The trust fund’s principal and interest earnings — on top of Social Security’s annual payroll taxes and other receipts — will enable Social Security to keep paying full benefits until 2036, and about three-fourths of scheduled benefits after that, even if Congress makes no changes to the program.

That certainly doesn’t mean we should sit on our hands till 2036, though.  As the Center’s president, Bob Greenstein, and Charles Blahous (an economic advisor to President George W. Bush, now at Stanford University’s Hoover Institution) agree, we should act well before then to spread any changes fairly across generations and allow today’s workers to plan their work, saving, and retirement.

Policymakers also must act before 2018 to restore solvency to the Social Security disability program, even if only to reallocate tax revenues between the disability and retirement programs.

But there’s no crisis, and plenty of time to get Social Security reform right.

Print Friendly

More About Kathy Ruffing

Kathy Ruffing

Kathy Ruffing is a Senior Fellow at the Center on Budget and Policy Priorities, specializing in federal budget issues.

Full bio | Blog Archive | Research archive at CBPP.org

1 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. dale coberly #
    1

    Kathy

    no “reform” is needed. Social Security does not contribute to the deficit, and it can pay for itself forever with no changes at all. The shortfall you keep hearing about is based on a misunderstanding of the Trust Fund, and a misunderstanding of “actuarial insolvency.”

    The Trust Fund is not Social Security. it is essentially designed to run out of money as the boomer retirements are paid for (leaving a small reserve to cover day to day imbalances between taxes in and payments out, and longer term imbalances arising from recessions.

    The actuarial imbalance is based on the assumption of no change in present taxes. But a tax increase of one half of one tenth of one percent per year would enable the post boomers to retire at the same age as today, and to enjoy a benefit that is the same proportion of their much higher earnings as today.

    Peterson’s billion dollar lie campaign has so distorted these simple facts that even people who should know better get confused trying to explain them.



Your Comment

Comment Policy:

Thank you for joining the conversation about important policy issues. Comments are limited to 1,500 characters and are subject to approval and moderation. We reserve the right to remove comments that:

  • are injurious, defamatory, profane, off-topic or inappropriate;
  • contain personal attacks or racist, sexist, homophobic, or other slurs;
  • solicit and/or advertise for personal blogs and websites or to sell products or services;
  • may infringe the copyright or intellectual property rights of others or other applicable laws or regulations; or
  • are otherwise inconsistent with the goals of this blog.

Posted comments do not necessarily represent the views of the CBPP and do not constitute official endorsement by CBPP. Please note that comments will be approved during the Center's business hours. If you have questions, please contact communications@cbpp.org.




seven − 4 =

 characters available