By James D. Agresti
June 22, 2012
The 2012 Social Security Trustees Report—the authoritative source on the program’s finances—states that the program’s “trust fund assets” will “continue to grow” through 2020, a claim that has been repeated by numerous sources as varied as US News & World Report, the AFL-CIO, and the American Academy of Actuaries. However, as revealed by data buried deeper in the 252-page Trustees Report, this assertion disregards the effects of inflation, which are projected to overrun any expected trust fund gains and contribute to an accelerating decline that will start in 2013.
Making financial claims that fail to account for inflation, per the Journal of Accountancy, “does not deliver a message that is completely true and fair.” Likewise, the textbook Cost Accounting: Principles And Practice states that “inflation accounting presents a true and correct view of the financial state of affairs of a firm,” and the academic serial work Quantitative Investing for the Global Markets affirms that “we should be concerned not with nominal quantities [i.e., those not adjusted for inflation] but with real ones.”
In 2010, for the first time in 25 years, Social Security’s expenses exceeded its income from payroll taxes and taxes on Social Security benefits. This state of affairs continued in 2011 and is projected to continue every year into the foreseeable future. Nonetheless, Social Security has two other source of income: transfers from the general fund of the Treasury (like those required under the 2011 and 2012 payroll tax holidays) and interest that the program receives from its trust fund, which is comprised of Treasury bonds.
The transfers from the general fund of the Treasury are allegedly temporary and represent a gift to the Social Security program mainly financed by income, corporate, and excise taxes. On the other hand, the interest on the trust fund primarily stems from previous surpluses of Social Security taxes that were loaned to the Treasury. As recently as two years ago, this interest was supposed to keep the trust fund growing for a decade after Social Security’s expenses began exceeding its tax income.
In 2010, Social Security’s Office of the Chief Actuary projected that this interest income would keep the trust fund growing in real value through 2020. The 2011 projections moved this date to 2018, and the recently released 2012 projections pushed the date to 2012, meaning that the trust fund will start declining in real value next year. After 2013, the trust fund is projected to decline by greater amounts each year until becoming exhausted in 2033.
After 2033, Social Security’s projected shortfalls could be covered by increasing payroll taxes by 33% starting in 2033 and rising slightly thereafter. These deficits could also be covered by reducing benefits by 24% starting in 2033.
There are several other ways of expressing the program’s expected shortfalls. One measure commonly cited by the press is the 75-year open group unfunded obligation, which amounts to $8.6 trillion. This represents the money that must be immediately added to the trust fund to cover projected shortfalls for the next 75 years. To give this figure some context, it is equivalent to 10.7 times the total income for Social Security in 2011 or an additional $54,500 from every person who paid Social Security payroll taxes in 2011.
The open group unfunded obligation, however, does not provide a full accounting of Social Security’s commitments. According to the Treasury Department’s Financial Report of the United States Government, this metric “understates financial needs by capturing relatively more of the revenues from current and future workers and not capturing all of the benefits that are scheduled to be paid to them.” A measure that accounts for this is the closed group unfunded obligation, which reveals how much money must be immediately added to the trust fund to cover the projected shortfalls for all current taxpayers and beneficiaries in the Social Security program. This approximates the method by which publicly traded companies are required by law to report the finances of their pension and retirement plans, and it currently amounts to $21.6 trillion or an additional $136,900 from every person who paid Social Security payroll taxes in 2011.
Even the closed group unfunded obligation assumes a proactive approach to Social Security’s looming deficits. If, instead, we continue on our current path and just borrow the money to fund these programs, the shortfall will amount to an additional $276,000 (in 2012 dollars) for every person expected to be paying Social Security taxes in 2086.
It also bears noting that all of the measures described above may be optimistic because they are based upon the Social Security’s Administration’s intermediate assumptions, which have proven to be far more positive than actual outcomes.