Once-Massive Social Security Surplus Vanishing
Policy + Politics

Once-Massive Social Security Surplus Vanishing

Experts warn the government will have to increase borrowing amid the recession and declining payroll taxes.

iStockphoto/The Fiscal Times

The once massive Social Security surplus is vanishing, a casualty of a severe recession that has driven down government payroll tax collections.

The surplus has long been a boon to government budget planners and policymakers, offsetting a portion of the deficit and reducing the amount the federal government has had to borrow to operate by nearly $1.2 trillion over the past quarter century, according to government figures.

But now that is all changing. The economic downturn cost millions of workers their jobs and caused payroll tax collections to fall modestly instead of rising significantly, as they had for many years. This funding reversal doesn’t pose an immediate threat to Social Security, according to experts, but it will likely add substantially to the government’s borrowing requirements in coming years.

Economist Henry Aaron of the Brookings Institution, an expert on Social Security, said that in terms of the interaction between Social Security and government borrowing, the recession brought forward “the crossover point” — the year in which tax revenues no longer covered all the costs.

“Last year the Social Security trustees put the crossover point for payroll taxes at 2014,” Aaron said. “If you toss in the income taxes on benefits earmarked for the trust fund, it’s 2016.”

As recently as 2006, tax receipts funneled into the Social Security trust funds for old-age and disability benefits exceeded costs by $87 billion, according to the Social Security Administration. Last year, by contrast, the government took in only $3 billion more in payroll taxes from employers and employees than the $686 billion it paid out in old-age, survivors and disability benefits.

      

The years of surpluses were the result of Social Security tax increases and benefit reductions adopted in 1983 when the system was virtually bankrupt. The intention was to create a large trust fund to cushion the impact of the eventual retirement of the baby boom generation, when there would be fewer workers making contributions relative to the number of beneficiaries.

By the end of 2009, the trust fund’s balances had grown to just over $2.5 trillion, all of which is invested in special Treasury securities. Those are obligations backed by the full faith and credit of the government, just like Treasurys owned by the public.

     

As the surpluses piled up, the trust fund also received interest payments on the Treasury securities they held. With the benefit of compounding, those payments have roughly doubled the fund balances.

If things had been different and the government had to borrow $1.2 trillion of that amount, it “would be paying both Americans and foreigners more interest on the debt,” Aaron said.

     

The need to sell more debt to the public might also have caused interest rates on Treasury securities to rise at least slightly, which would have made all the government’s borrowing more costly.

According to figures contained in a recent Congressional Budget Office analysis, the annual surpluses are all but gone for good. Nevertheless, the trust fund will remain in relatively good shape for another decade or so because it will receive an estimated $120 billion a year in interest payments.

    

Aaron bristled at reports that Social Security is somehow in trouble because it may have to begin to use a small portion of those interest payments to fund some of the benefits. That was precisely what was expected to happen eventually when the changes were made in 1983, he said.

Even if it turns out there are some additional surpluses in the next few years, Aaron said they would not be large, and “it may be things won’t bounce back fast enough to offset the increasing retirement of the baby boomers.”

The oldest of those in that population bulge were born in 1946 and turned 62 — the youngest age at which even reduced retirement benefits can be claimed — two years ago. Some analysts have speculated that some workers may be turning to Social Security because they have lost jobs during the recession.

But having the crossover point come a few years sooner will have little impact on the long-term health of the retirement program. In last year’s report, Social Security trustees said the trust funds balances and the income from taxes and interest payments would allow full benefits to be paid in full through 2036. After that, year-to-year income from taxes would be enough to pay about three-fourths of promised benefits.

Social Security’s future is one of the tough issues that will be on the table this fall when President Obama’s new National Commission on Fiscal Responsibility and Reform tries to find ways to stabilize the government’s long-term budget outlook.

John M. Berry covered the Federal Reserve and the U.S. economy for The Washington Post for 25 years.

TOP READS FROM THE FISCAL TIMES