For those of us who consider President Franklin Delano Roosevelt more of a political grifter than a policy innovator, it's no surprise that his signature fiscal legacy, Social Security, is in dire financial straits. New data from the Congressional Budget Office (CBO) once again points out that the program, which was crafted from the beginning to meet political needs rather than economic reality, requires either a massive infusion of funds or else drastic cuts to benefits in order to maintain its viability. Of course, Social Security is only part (though a significant part) of the commitments taken on by a federal government committed to fiscal irresponsibility.
"Because the trust funds' revenues are currently lower than their outlays and projected to grow more slowly than those outlays, the Social Security program has a long-term actuarial deficit," a CBO data update noted last week. "Over the next 75 years, if current laws remained in place, the program's actuarial deficit would equal 1.7 percent of GDP, or 4.9 percent of taxable payroll, CBO projects."
The problem is that Social Security has been paying out more than it collects from payroll taxes for a decade. To meet its obligations, the program funds benefits from assets held by the Old-Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI)—but those funds can only last for so long.
"CBO projected that the OASI trust fund would be exhausted in calendar year 2032 and the DI trust fund in calendar year 2035—again, if current laws remained in place," notes the CBO. "If the funds' balances were combined, the resulting Old-Age, Survivors, and Disability Insurance (OASDI) trust funds would be exhausted in calendar year 2032."
Complicating this, though, is what the Social Security Administration considers to be "assets" on which the trust funds draw: namely, IOUs from the rest of the federal government, which borrowed from the program and long ago spent the money.
Trust fund balances "do not consist of real economic assets that can be drawn down in the future to fund benefits," points out the Cato Institute's Michael Tanner. "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."
The federal government itself, let's not forget, is broke. The CBO projects federal expenditures to continue outstripping revenues by an ever-widening gap for the foreseeable future—30 years, at least. So, the trust funds' "assets" are promises of repayments from an Uncle Sam who could only meet the obligation by going even further into debt. And that's without getting into the unfortunate reality that CBO's dire official assessment of federal finances might actually be a tad too rosy. But why introduce such unpleasantness into the conversation?
That said, exhaustion of the trust funds has important implications. "At the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 79 percent of scheduled benefits," the Social Security Administration admitted in its 2020 annual report. The inability to meet obligations would only worsen from there with a growing gap between revenues and expenditures.
To balance the books, the CBO points out, requires a hike in payroll taxes, cuts in benefits, or some combination of the two. Tax hikes are definitely part of the Biden administration's agenda, but so are plans for trillions of dollars in increased spending. That's not how you balance books already awash in red ink.
Benefit cuts, then, may become necessary to keep Social Security going, says the CBO. To keep the program solvent for 75 years, reductions of 30 percent starting in 2022 would have to be made to the benefits of all current and future beneficiaries. "These reductions would achieve a 75-year OASDI actuarial balance of zero but would not be large enough to prevent exhaustion of the combined trust funds during the period," adds the CBO.
Waiting longer to address the problem would make the pain worse.
From the beginning, the economic calculations behind Social Security have always been shaky. That's not necessarily by design, but certainly out of disregard for dollars-and-cents concerns in a program that was primarily seen as a political project.
"I guess you're right on the economics," FDR told Luther Gulick, an advisor who criticized the use of payroll taxes to fund Social Security. "They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren't a matter of economics, they're straight politics."
As per FDR's intent, Social Security has proven impossible to kill. It has also demonstrated a remarkable resistance to even modest modification or reform intended to make it conform more closely to financial reality. At this point, it's a Frankenstein monster of a government scheme: wreaking havoc, seemingly unstoppable, and rampaging toward an uncertain fate.
Then again, you could say the same about the federal government itself, which keeps its overall books every bit as divorced from reality as does the Social Security program.
"[F]inancing a large and permanent increase in government spending through perpetual borrowing without any corresponding adjustment in spending or revenues at some point in the future is unsustainable," the CBO warned in March in response to proposals for a much larger and more-active government. But the revenue increases to support such spending have their own costs.
"After 10 years, the level of GDP by 2030 is between 3 percent and 10 percent lower than it would be without the increase in expenditures and revenues," the CBO added. "In those scenarios, younger households experience greater loss in lifetime consumption and hours worked than older households."
Social Security then, with its grandiose promises disconnected from any ability to meet its obligations, is a fitting representative of the federal government by which it's administered. We're all bound to pay a nasty price when the bill for both of them comes due.