A recent Associated Press story said that Social Security will need to “start cashing Uncle Sam’s IOUs” because the recession is adding to the system’s financial problems. The article said “the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn’t be worse.”
This is simply not true. According to the Congressional Budget Office — the source cited in the article — Social Security will continue to run a surplus for years to come, with the combined old age and disability trust funds projected to grow from $2.5 trillion in 2009 to $3.8 trillion in 2020. See Figure.
What is true is that the economy has shed eight million jobs, so payroll tax receipts are down 2.5% compared to pre-recession estimates. As a result, Social Security is projected to run a primary deficit—a measure that excludes interest on trust fund assets — until 2014, when CBO expects the economy will be back at full employment.
Even though outlays will exceed payroll tax revenues, Social Security is not about to become a net seller of Treasury bonds, and is in fact still acquiring them to the tune of $100 billion a year. However, the story has taken off because it fits with the preconception that Social Security is in crisis and its finances are suspect.
The AP article uses the notion that Social Security is about to start tapping into savings as a hook to revisit the famous filing cabinet in West Virginia where the trust fund is held in the form of Treasury bonds, which the author says are “worthless on the open market.” This is technically true in the sense that the bonds, though similar to those held by the public, are “special-issue securities” redeemable at face value before they mature. But this actually makes them more, not less, valuable.
The fact that these bonds can be redeemed for cash at any time will come in handy when we do start drawing down the trust fund, which will probably begin some time after 2020. This is exactly what the trust fund is there for – to help finance the retirement of the large Baby Boom generation. Since Social Security has always been funded primarily out of current tax revenues, the trust fund balance should be close to zero under normal circumstances.
This is not to say that the system faces no challenges. Because wages for most workers were flat even before the recession hit, Social Security’s finances have been slipping since the system was last in balance in 1983. The system also needs periodic adjustments to address changes in life expectancy and other long-term trends. Thus, CBO projects that payroll tax receipts will only cover about 80% of promised benefits after the trust fund is drawn down in coming decades.
To put this in perspective, future generations will still receive higher benefits, in inflation-adjusted terms, than retirees today because of economic growth. Nevertheless, it would be far preferable to raise revenues so promised benefits can be paid in full. This can be achieved by increasing payroll taxes a modest amount (equivalent to 0.5% of GDP)—or better yet, by taxing earnings above $106,800, as Medicare already does. Polls show that Americans of all ages and political stripes would support a modest tax increase to preserve Social Security benefits for future generations.