No Need for Alarm

No Need for Alarm

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Writing in the Washington Post, Allan Sloan recently asserted that “even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.” Greg Burns reported in the Chicago Tribune that “this year, Social Security will be running in the red for the first time in a quarter-century.” Last week, Mary Williams Walsh of the New York Times joined the chorus. Yet all of these analysts get a key fact wrong and seek to make a story out of what is, frankly, a non-event.

Social Security is not running a deficit, although the recession has taken a toll on the program. Payroll taxes, like almost all federal revenues, are very sensitive to macroeconomic conditions. As employment and earnings have fallen in this deep downturn, so have Social Security’s tax revenues.

Social Security benefits are not as sensitive to the business cycle as other “safety-net” programs — notably unemployment insurance and food stamps. But a sagging economy tends to boost the number of recipients. There’s evidence that many people are retiring earlier than they would like because they can’t find a job. And disability applications have surged.

So a recession crimps Social Security revenues and boosts the program’s benefit outlays. No surprise there.

Investors recognize that today’s large deficits result partly from cyclical factors. As long as lenders continue to finance our deficits at reasonable interest rates, there’s no crisis in Social Security or any other part of the budget. Economic recovery will bolster the overall budget, including Social Security — though still leaving us with stubborn, structural deficits that aren’t sustainable over the long run. It’s those long-run deficits that worry the markets, and ought to worry concerned citizens.

It’s true that Social Security will temporarily run a cash-flow deficit for several years until the economy recovers. (The Congressional Budget Office and the Office of Management and Budget both say so, and the new Social Security trustees’ report — expected in a few weeks — may agree.) But those agencies don’t trumpet that prediction, and for good reason. The cash-flow deficit ignores a huge source of Social Security income: interest on the funds’ vast holdings of Treasury bonds. (Including interest, the program is expected to run a $91 billion surplus this year, not a deficit.) And the cash-flow deficit has no significance for the program’s ability to pay benefits.

The program’s condition thus differs sharply from the situation in early 1983 — another period that followed a deep recession. Then, the program ran deficits; today, Social Security runs surpluses. Then, the funds’ balance skated dangerously close to zero, and benefits were imperiled until Congress stepped in with a rescue package (crafted with the help of the famous Greenspan Commission). Today, in contrast, the funds own $2.5 trillion worth of securities.

Social Security can continue paying full benefits until the trust funds run out. Last year’s trustees’ report predicted that would happen in 2037 — fourteen years after the trust fund peaks in 2023. After 2037, if Congress takes no action whatsoever to change the program, Social Security could still pay about three-quarters of benefits. Nobody wants that to happen — and policymakers will surely take steps to prevent it — but it’s clear that, despite alarmist headlines, that day of reckoning is still almost three decades away.

Social Security’s imbalance is manageable in size and poses a far less thorny challenge than the explosive growth in health-care costs. The new health care law puts a dent in the trajectory of health-care costs, but we still have much to learn about controlling cost growth and will have to revisit the issue regularly. In contrast, the possible solutions for fixing Social Security are well known. Various organizations have laid out menus for doing the job with tax increases, benefit reductions, or some blend of both.

Two of the best are put together by the Center for Retirement Research at Boston College and the National Academy of Social Insurance. It’s important to phase in changes gradually so that people can adjust their decisions about work and saving. Although there is no imminent crisis in Social Security, tackling the problem soon could enable a fair, balanced solution while assuring creditors that the United States is getting its fiscal house in order.

Post your comment below or check out our  experts' debate on the fate of Social Security: Henry Aaron on Social Security's alarmist math;  Lawrence Haas on looking for savings; and  George Hager on its accounting fictions;  Joseph White on the difficulty in changing the system.

Kathy Ruffing is a senior policy analyst with the Center on Budget and Policy Priorities.