Courtesy of Doug Short.
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In August, the Congressional Budget Office (CBO) released its latest long-term projections for the Social Security Trust Funds. This is not the first time the CBO has offered its forecast. Every August for the past four years, it has issued a report on the program’s long-term fiscal health and solvency.
The latest projections show the combined trust funds — the Old Age and Survivorship Income (OASI) and Disability Income (DI) — are two other casualties of 2008’s financial market storm. As a result of the pronounced decline in economic activity and the sharp increase in unemployment, the two trust funds have been blown off budget and are sailing faster towards insolvency.
In the CBO’s 2008 projections, 2050 was projected as the insolvency date — the year in which expenditures are projected to exceed assets. In its latest forecasts, the CBO estimates the insolvency date has advanced steadily to 2039. The decline in private, non-farm payrolls and anemic wage growth following the onset of the recession have reduced the payroll taxes flowing into the OASI and DI trust funds. Between 2008 and 2010, payroll tax contributions to the OASI trust fund declined by $29.8 Billion. For the DI trust fund, the corresponding decline was $5.1 Billion.
Pressure is being exerted not just on the revenue side. Expenditures by both funds have also risen, further contributing to the accelerated drift towards insolvency. For the OASI, the first wave of baby boomers retiring has pushed annual social security payments higher by $68.7 Billion between 2008 and 2010. As a consequence, trust fund asset growth has slowed, reducing the cushion available to pay future benefits.
For the Disability Income fund, the situation has become even more precarious. Between the 2nd Quarter 2008 and the 2nd Quarter 2011, 1.2 Million more individuals received disability payments. This represents a 16.2 percent increase in the number claiming benefits. This trend is not unusual: the ranks of the disabled generally rise during economic downturns. Whatever the reason, the effect is the same: disability payments have surged $18.7 Billion (or, 17.2 percent) between 2008 and 2010. The combination of higher payments and reduced payroll taxes produced a $23.6 Billion deficit in 2010. It is unlikely this shortfall will be closed in 2011.
Years — no, decades — of procrastination and prevarication by Congress have winnowed the policy options to a range of unpalatable choices. To restore the trust funds’ fiscal stability, either large payroll tax increases or broad reductions in benefits are needed, coupled with yet another increase in the full retirement age. For years, both Democrats and Republicans thought there might be a way to navigate around the problem. Unfortunately, the only route was always through the Scylla of job destroying payroll tax increases or the Charybdis of benefit cuts. For all, it would have been better to have navigated the passage in calm seas than in the current tempest.
Notes:
The charts were derived from annual projections by the Congressional Budget Office (CBO) made between 2008 and 2011.
The Trust Fund Solvency Ratio is computed as the ratio between the trust funds’ assets at the start of a year and their projected benefit payments. A positive ratio implies trust fund assets exceed projected benefit payments. Median forecasts are shown for each year.
The gray shaded region and lines illustrate the forecast sensitivity to assumption changes. This region extends from the 10th (unfavorable) to the 90th (favorable) percentile of solvency ratio projections in any of the forecast years. This sensitivity analysis is from the CBO’s latest, August 2011 projections.
The underlying assumptions are the same assumptions used by the CBO in its Long-Term Budget Outlook.
(Source: Congressional Budget Office; Social Security Administration, Office of the Chief Actuary.)
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