from Follow the Money

The Washington Post really doesn’t like Social Security …

January 16, 2007

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Best I can tell, Social Security is in the best financial shape of any federal program.  It is in far better future shape than Medicare.   And it is in way better shape than the portion of the government that isn’t financed by the payroll tax.   That part of the government has a $434 billion deficit.   Social Security, by contrast, has a $185b cash flow surplus

Social Security’s revenues exceed its expenditures – and will continue to do so for several years.  Its financial assets are growing – they will top $2 trillion at the end of this year.   Sure, it will need to draw on the interest on those assets in about ten year -- and a few after that, it will need to tap the principal as well.  But wasn't that the point of building up the Social Security system’s assets?   

Consequently, I don’t see why 2017 is a date that causes the social security system any trouble – no matter what Lori Montgomery and Nell Henderson write in the Post

“Social Security surplus will begin to shrink in 2009, as the baby boomers start to retire. It is it estimated that the fund will dry up completely in 2017”

The Social Security trust fund won’t dry up in 2017, according to any projection.   Or even 2018 or that matter.  That is when the CBO now projects Social Security benefits will first exceed payroll tax revenues (spreadsheet here). In 2018, Social Security will have to use the interest on its assets to cover its projected benefits.  No big deal.

Dean Baker has more. 

2018 is – by contrast – a date that could cause the rest of the government a bit of trouble.  That is when the rest of the government has to stop borrowing from the Social Security system and -- shockingly -- start repaying the Social Security system.

I usually note that the US fiscal deficit is financed by official investors about –  led by our friends over the People’s Bank of China and the Saudi Monetary Agency.    That actually is inaccurate.   The gap between the revenues of the government (excluding Social Security payroll tax revenues) and the government’s expenditure (including Social Security expenditure) is covered by financing from official investors both at home and abroad.   The Social Security trust fund now provides the rest of the US government with far more financing than the People’s Bank of China.

2018 is when that really changes.  From 2018 until 2040 (Trustees, see Figure II.D.4) or 2045 (CBO) or a bit longer, depending on what projection you prefer, the Social Security will be drawing on its accumulated assets. If official investors abroad cut the US off at the same time, the Treasury might be in for a rude shock. 

But the reason for that shock is simple: right now, the non-Social Security government doesn’t collect enough revenue to cover non-Social Security expenditures.

Thanks largely to the Bush Administration’s tax cuts, and that little war the US is engaged in over in the Middle East.   You know the one – the one that wasn’t going to cost the US anything

Sebastian Mallaby is a friend, even if I only occasionally agree with what he writes.  But I really don’t see how the Democrats unwillingness to gut the revenues (that is what partial privatization does) of a program that has a cash flow surplus, substantial assets and can pay all promised benefits til something like 2045 and perhaps longer and even after that can easily pay something like 2/3s of its promised benefits constitutes a fiscal crime at all comparable to a shift in the structural fiscal balance of the rest of the US government that occurred over the last six years.

Mallaby wrote

“Stretching just a little bit, Bush may slough off fiscal vandalism and emerge as the lesser of two budgetary evils. Consider: The Democrats have already slammed the door on Social Security reform and are now sorely tempted to propose congressional initiatives that aren't paid for."

That is stretching more than just a little. 

The structural shift in the fiscal deficit could easily be more than 3% of GDP.  From 2000 to 2006, the “on budget” balance – roughly a measure of the fiscal balance of the non-social security government -- went from a surplus of 0.9%  of GDP to a deficit of 3.3% of GDP, a swing over 4 percentage points.  (CBO data, including historical data)

That 4 percentage point change includes some cyclical component, but it is mostly structural.   

Those deficits are in the here and now.    They aren’t projections.   They won’t magically go away.   Not unless the US dramatically scales back its defense spending, which hardly seems like something the Washington Post oped page wants.   

The Social Security system’s future deficit by contrast is a projection, subject to uncertainty in both directions.  And even in the CBO’s baseline case, it is smaller in 2055 than the rest of the government’s deficit is today.   The CBO puts the 2055 Social Security deficit at about 1.5% of US GDP (spreadsheet here) – far smaller than the 3.3% current deficit in the non-Social Security part of the government.

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