Makin' Money

Putting Social Security’s deteriorating finances in context

Chris Farrell Apr 24, 2012

The annual Trustees report on Social Security shows that the retirement system’s finances are deteriorating. How alarmed should we be? Cries about an impending Greece-like catastrophic collapse are simply wrong. That said, the need for reform is pressing and political delay is needlessly risky.

The Center for Retirement Research at Boston College offers a careful review of the latest analysis in the Trustees report in Social Security’s Financial Outlook: The 2012 Update in Perspective. It’s by economist and Center director Alicia Munnell. A few highlights:

Social Security’s 75-year deficit is significantly higher than last year’s projection: 2.67 percent of payroll versus 2.22 percent of payroll. The increase largely reflects the slow recovery from the recession and rising disability rolls.

By one measure the shortfall is frightening: $8.6 trillion. It’s a big number that reflects the present discounted value of the difference between projected Social Security revenues and Social Security expenditures over the next 75 years.

That said, Munnell points out it’s critical to remember the economy will be growing. Dividing the $8.6 trillion — plus a 1-year reserve cushion — by taxable payroll over the next 75 years brings the figure back to a 2.67 percent deficit. As a percent of GDP over the next 75 years, the deficit is 0.9 percent. (See the chart at the top of the post.) Not good. But hardly catastrophic.

I think Munnell is on target with her bottom line.

While Social Security’s shortfall is manageable, it is also real. The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits. There is no silver bullet. Despite the political challenge, stabilizing the system’s finances should be a high priority to restore confidence in our ability to manage our fiscal policy and to assure working Americans that they will receive the income they need in retirement.

I’d vote for dealing with Social Security’s financing gap now.

There are no magic elixirs or fiscal wands that will painlessly put the federal government’s fiscal house in order. It will take political compromise.

Still, there is a fiscal maneuver that could greatly ease the job. Most commentary assumes that socialsecuritymedicaremedicaid is one word. They’re all entitlement programs. But the bulk of the long-term budget pressure comes from higher health-care spending. Indeed, if you’re worried about the long-term budget deficit, just think health care, health care, health care.

In sharp contrast, the Social Security financing gap is far more manageable and much less controversial. I’d separate Social Security from the rest of the entitlement fight and deal with reforming the retirement system on its own merits.

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