September 29, 2009
By David C. John
Starting this year, Social Security will spend more in benefits
than it will receive from its payroll taxes. This is somewhat
unexpected as just last year, the 2009 cash surplus was predicted
to be about $80 billion. Even in May of this year, the program's
actuaries predicted a roughly $19 billion surplus. However, they
failed to allow for the full effects of the recession, and the
soaring unemployment both reduced tax collections and increased the
number of workers who were forced to take early retirement.
This is very bad news for taxpayers, but worse is yet to follow.
The 2009 deficit of about $10 billion will be followed by a 2010
deficit of about $9 billion. If there is a strong recovery--which
is questionable at best--the program could briefly return to
surpluses. But by 2016, deficits will return and continue
permanently. A far more likely scenario is that Social Security
will run deficits from this point on.
The Reality of the Trust Fund
These deficits do not mean that benefits will be cut, but they
do increase the burden on taxpayers to pay them. On top of the $1
trillion-plus deficit predicted for this year to pay for the Obama
Administration's programs, taxpayers will have to find still more
money to pay Social Security's deficits. It is true that a trust
fund exists that has been funded by $2.4 trillion of Social
Security surpluses since 1983, but there is no real money in that
As the Office of Management and Budget said in 2000, "These
balances are available to finance future benefit payments ... only
in a bookkeeping sense. They do not consist of real economic assets
that can be drawn down in the future to fund benefits. Instead,
they are claims on the Treasury that, when redeemed, will have to
be financed by raising taxes, borrowing from the public, or
reducing benefits, or other expenditures."
Congress has already spent every penny of that money, and all
that is left are IOUs that must be repaid by the same taxpayers who
paid the extra taxes in the first place. Taxpayers, not the trust
fund, will end up covering Social Security's deficits.
Massive Deficits and an Even Worse
This May, Social Security predicted that it would first run
deficits in 2016, and after that the picture was grim. After
adjusting for inflation, annual deficits were predicted to reach
$68.5 billion in 2020, $170.4 billion in 2030, and $293.6 billion
in 2035. Now those deficits will come much sooner than
In net present value terms, Social Security owes $7.7 trillion
more in benefits than it will receive in taxes. This consists of
$2.4 trillion to repay the special issue bonds in the trust fund
and $5.3 trillion to pay benefits after the trust fund is exhausted
in 2037. In other words, Congress would have to invest $7.7
trillion today in order to have enough money to pay all of Social
Security's promised benefits between 2016 and 2083. This money
would be in addition to what Social Security receives during those
years from its payroll taxes.
According to the 2009 Trustees Report, Social Security is
projected to owe $7.4 trillion after 2083, making a perpetual
deficit of $15.1 trillion. Last year's number was $13.6 trillion.
This means that Social Security's total deficit continues to grow
well beyond the 75-year projection period. Therefore, any reform
that just eliminates deficits over the 75-year window will not be
sufficient to solve the program's problems.
Many opponents of reform claim that raising payroll taxes by
about 2 percent (the average percentage difference between revenues
and outlays over the 75-year period) would solve Social Security's
problems. The reality, however, is that the program's future
deficits are projected to be large and growing, so this tax
increase would still leave a huge shortfall.
There are three ways to fix Social Security:
The first two will take years to have a real effect. Accounts of
any size need to grow for about 20-25 years before they are large
enough to pay much in the way of retirement benefits. Moreover,
benefit changes are politically feasible only if current retirees
and those close to retirement are not affected, which means that it
would be several years before benefit changes start to take
On the other hand, some prefer tax increases because they would
immediately pump money into Social Security. But that band-aid
would just delay the start of real long-term reform and make it
much more likely that Congress would keep taking the easy way out
by raising taxes.
Fix Social Security Now or Face the
Social Security's future has arrived early. After years of talk
about how well-funded the program is, the reality is that
never-ending deficits will eat up money that could be used for
other programs or tax cuts. Despite reassuring words that these
deficits are temporary, the reality is much worse. These deficits
are likely to be permanent, and the only way out of this cash
crunch is to fix the program.
David C. John is Senior Research Fellow in
Retirement Security and Financial Institutions in the Thomas A. Roe
Institute for Economic Policy Studies at The Heritage
Show references in this report
Office of Management and Budget, Budget of
the United States Government, Fiscal Year 2000: Analytical
Perspectives (Washington, D.C.: U.S. Government Printing
Office, 1999), p. 335.
Social Security's deficits are likely to be permanent, and the onlyway out of this cash crunch is to fix the program.
David C. John
Senior Research Fellow in Retirement Security and Financial Institutions
Read More >>
Heritage's daily Morning Bell e-mail keeps you updated on the ongoing policy battles in Washington and around the country.
The subscription is free and delivers you the latest conservative policy perspectives on the news each weekday--straight from Heritage experts.
The Morning Bell is your daily wake-up call offering a fresh, conservative analysis of the news.
More than 450,000 Americans rely on Heritage's Morning Bell to stay up to date on the policy battles that affect them.
Rush Limbaugh says "The Heritage Foundation's Morning Bell is just terrific!"
Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."
Sign up to start your free subscription today!
The Heritage Foundation is the nation’s most broadly supported public policy research institute, with hundreds of thousands of individual, foundation and corporate donors. Heritage, founded in February 1973, has a staff of 275 and an annual expense budget of $82.4 million.
Our mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. Read More
© 2015, The Heritage Foundation Conservative policy research since 1973