A flurry of commentary greeted the unsurprising news last week that Social Security is paying out more than it is taking in. According to the Congressional Budget Office (CBO), the Social Security cash deficit for 2010 was $37 billion and will rise to $45 billion this year. The one-year payroll tax holiday enacted in December would actually leave the 2011 deficit much larger ($130 billion), but general revenues will be credited to Social Security to make up for the loss of payroll tax income.
Looking ahead, CBO now projects that Social Security will run perpetual cash deficits, amounting to $547 billion through 2021. By that year, CBO projects that Social Security outlays will exceed cash income by $118 billion.
Viewed as a percentage of the gross domestic product (GDP), Social Security’s cost will grow from 4.8 percent this year to 5.3 percent in 2021.
Running a cash deficit does not mean that full benefits cannot be paid. When there is a shortfall in cash income, Social Security can draw on its trust fund balance to continue issuing checks. Currently, the trust fund has a balance of $2.7 trillion and is projected to remain “solvent” until 2037. But this method of “financing” only serves to demonstrate why the government’s largest program will become a growing budgetary challenge.
The trust funds are simply a claim on future general revenues. They represent a promise from one arm of the government (Treasury) to pay another arm of the government (Social Security). Coming up with the cash to make good on that claim will mean squeezing out other spending, raising taxes, or borrowing from whoever is willing to lend us the money. Some combination of these will be necessary to close the gap and the sooner this problem is addressed, the better.
We can no longer pretend that today’s entitlement promises can be financed with today’s revenue level. In this regard, it is crucial to note that Social Security’s future draw on general revenues is small in comparison to the projected needs of Medicare and Medicaid. At some point soon, we need to decide how much to reduce promised benefits and/or raise taxes to pay for them. The fact that Social Security is already paying out more than it takes in -- before the vast majority of baby boomers qualify for benefits -- highlights the trade-offs that must be made to prevent an explosion of debt.
Cost-reducing reforms should be phased in, beginning as soon as possible. But because it will take several years to produce big savings from these changes, other options to control the short-term debt spike need to be taken. These include discretionary spending cuts, including defense, but should also include reconsideration of expiring tax cuts. For example, the one-year cost in 2021 of extending the 2001 and 2003 tax cuts plus relief from the Alternative Minimum Tax (AMT) amounts to $546 billion, roughly the same cost as covering the 10-year cash shortfall of Social Security ($547 billion).