Abstract
Social Security ran a $39 billion deficit in 2014, closing out five years of consecutive cash-flow deficits as the program’s revenues from the payroll tax and the taxation of benefits are falling short of benefit payments. Absent reform, Social Security benefits will be cut across the board by 23 percent in 2035. Action should be taken today to protect Social Security’s most vulnerable beneficiaries from such drastic cuts without burdening younger generations with massive tax increases or unsustainable debt. Lawmakers should immediately replace the current cost-of-living adjustment with the more accurate chained consumer price index; raise the early and full retirement ages gradually and predictably; phase in a universal, flat benefit; focus Social Security benefits on those who need them most; and enable more Americans to save their money in private retirement accounts.
Social Security’s main program, also known as Old-Age and Survivors Insurance (OASI), ran a $39 billion deficit in 2014, closing out five years of consecutive cash-flow deficits as the program’s unfunded obligations continue to grow.[1] According to the 2015 annual Trustees’ Report, the 75-year unfunded obligation of the Social Security OASI Trust Fund is $9.43 trillion, a $70 billion increase from last year’s unfunded obligation of $9.36 trillion.[2] After including federal debt obligations recorded as assets to the Social Security trust fund of $2.73 trillion, Social Security’s total 75-year unfunded obligation is nearly $12.2 trillion.
The Social Security OASI program is projected to reach insolvency in 2035. This means that the program is expected to have only enough revenue from payroll taxes, interest on the Trust Fund balance, and repayment of borrowed Trust Fund dollars to pay out scheduled benefits until 2035. This is one year later than projected in last year’s report.[3]
If no action is taken to improve Social Security’s solvency before its Trust Fund runs dry, benefits will either be delayed or reduced across the board by 23 percent. Congress should avoid indiscriminate benefit cuts which would harm the most vulnerable beneficiaries the most by adopting commonsense reforms that modernize the outdated Social Security program.
Social Security Is Already Adding to the Deficit
While Social Security’s OASI program is considered to be solvent on paper through 2035, Social Security’s cash-flow deficit is already adding to the federal budget deficit.
Since 2010, the OASI program has taken in less money from payroll tax revenues and the taxation of benefits than it pays out in benefits, generating cash-flow deficits. The 2014 cash-flow deficit was $39 billion. Over the next 10 years, the OASI program’s cumulative cash-flow deficit will amount to $840 billion, according to the trustees’ intermediate assumptions. For as long as the federal government is running deficits in excess of Social Security’s cash-flow deficits, we can assume that this $840 billion shortfall will be matched dollar for dollar by an increase in the public debt.
Social Security’s cash-flow deficits add to the public debt because, in order to pay full Social Security benefits, the Treasury Department has to raise cash in excess of what it receives from the payroll tax and the taxation of benefits. Cash-flow deficits mean that the Treasury can no longer pay all Social Security benefits from the program’s tax income alone. Instead, Treasury must produce additional cash from taxes or borrowing. With annual federal deficits in excess of Social Security’s cash-flow deficit, the OASI program is already adding to the deficit.
Since 2010, the OASI program has taken in less money from payroll tax revenues and the taxation of benefits than it pays out in benefits, generating cash-flow deficits. The 2014 cash-flow deficit was $39 billion. Over the next 10 years, the OASI program’s cumulative cash-flow deficit will amount to $840 billion, according to the trustees’ intermediate assumptions. For as long as the federal government is running deficits in excess of Social Security’s cash-flow deficits, we can assume that this $840 billion shortfall will be matched dollar for dollar by an increase in the public debt.
Social Security’s cash-flow deficits add to the public debt because, in order to pay full Social Security benefits, the Treasury Department has to raise cash in excess of what it receives from the payroll tax and the taxation of benefits. Cash-flow deficits mean that the Treasury can no longer pay all Social Security benefits from the program’s tax income alone. Instead, Treasury must produce additional cash from taxes or borrowing. With annual federal deficits in excess of Social Security’s cash-flow deficit, the OASI program is already adding to the deficit.
What About the Trust Fund?
In the past, when Social Security ran cash-flow surpluses, the federal government spent those surpluses on other federal spending, and in return, the Treasury credited Social Security’s Trust Fund with special-issue government securities. Although this $2.73 trillion in securities is not counted in the total amount of debt held by the public, it represents real debt that will have to be repaid over the coming decades, unless Congress changes current law.[4]
The Social Security Trust Fund represents legitimate repayments plus interest, but this distinction has no bearing on the federal budget’s bottom line. Congress spent all the excess revenues when Social Security was running surpluses, and now repaying those revenues is adding to deficits. As Chart 1 shows, shortfalls in Social Security’s programs represent a considerable portion of current and future deficits.
Nevertheless, Congress may change current law at any time, including by eliminating the Social Security Trust Fund. Funds earmarked for OASI through its Trust Fund do not represent accrued property rights, even though these funds come from taxing workers’ wages. Congress’s authority to modify the Social Security program was affirmed in the 1960 Supreme Court decision in Flemming v. Nestor, wherein the Court held that individuals do not have a “property right” to their Social Security benefits, regardless of how many years they paid payroll taxes.[5]
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