On Tuesday, Marco Rubio introduced a vision for expanding retirement options, and shoring up Social Security in a pro-growth way (see what Reihan wrote about it below). This is important for a couple reasons: First, this hasn’t been something Republicans have talked about for years, and a confident, creative conservatism should have ideas on how to ensure that the program accomplishes its goal (providing a living for elderly who can’t support themselves).
But second, the forward-looking financial situation of the program has deteriorated significantly over the last half decade or so. The recession immediately sent it into the red — the dedicated revenues from the payroll tax dropped below the benefits being paid out for the first time in history, forcing the program to start drawing on its “trust fund” of debt that the Treasury owes it, which has to be paid for with general revenues. This is a problem for the federal budget, not just for the existence of Social Security, and it’s now a problem that is growing even faster than we expected. The Committee for a Responsible Federal Budget put together the following charts to show what’s been going on just during the week recovery, after the recession blew a hole in the program’s finances.
The changes in the near term are a little noisy, but as you can see, the actuarial projections have repeatedly gotten worse. And 0.whatever percent of GDP may not look like much, but of course it is — 0.4 percent of GDP is about $50 or 60 billion. That’s what self-sustaining Social Security is draining from the federal budget each year, and it’s only going to get a lot bigger. The difference is, interestingly, a combination of revenues and spending — payroll-tax collections keep disappointing, and people keep retiring earlier than expected (there is actually a lot more going on than just this, but those are two big issues and the intuitive, non-technical ones).
This gap means that the Social Security trust fund is shrinking a lot faster than expected — it’s on track to be exhausted in 2031 now, rather than 2038.
The odd thing about Social Security accounting is that it’s both useful and meaningless. In some sense, it’s relatively meaningless when the trust fund is actually exhausted — that will just be the point at which the program, judged from its inception until that date, begins spending general-revenue dollars rather than tax dollars.
But on a cash-flow basis, it’s already doing that today. Senator Elizabeth Warren likes to talk about making Social Security more generous without talking about how to pay for it, claiming that the program has a trust fund that will be funded for the next two decades. But that trust fund can’t produce any dollars without laying a claim on federal debt — which means less spending elsewhere in the federal budget, or higher income taxes. So as a legal and accounting matter, it’s quite right to say that benefits are scheduled to be cut to about three-quarters of what’s been promised in 2031 (what payroll-tax revenues will be able to pay for), but as an economic matter, this doesn’t much matter. The useful, angle of its accounting, though, is that because Social Security ties its spending to a specific revenue source, we can see how the individual program is growing faster than the revenues we’re supposed to be using to pay for it.
A final note: It’s always worth being skeptical of long-term budgetary projections (the above now extend seven years into the future) — obviously, the whole point of this post is that the projections for Social Security have dramatically worsened. But it’s hard to see how the long-term picture for Social Security could possibly improve: CRFB has done some neat work on how our health-care budget problem has gotten smaller of late, thanks to the slowdown in health-care costs that’s happened over the past decade. But as Social Security is designed, that can’t really happen, and unless the American economy grows noticeably faster than predicted or creates noticeably more employment opportunities than expected, Social Security’s picture really can’t improve.