- The Washington Times - Monday, April 4, 2005

Few public-policy issues in recent times have been as complex as Social Security. Trust funds. Trust fund ratios. The present value of unfunded obligations. 75-year horizon actuarial balance. “Clawback.” “Carve-outs.”

Probably no issue within the Social Security debate has become more confusing than the monetary income and outgo of Social Security’s combined Old Age, Survivors and Disability Insurance (OASDI) trust funds. With any issue as complex and as complicated as Social Security, analytical errors are inevitable and unavoidable, especially under the deadline pressure of the news industry. Erroneous reporting, however, has the potential to make a very complex issue utterly incomprehensible. One substantive error (still uncorrected), which involved the income and outgo of the OASDI trust funds, occurred March 25 on the editorial page of the Wall Street Journal. The result has been even more confusion. In the interest of making a complex issue more understandable, what follows is an explanation of how the OASDI trust funds operate.

The combined OASDI trust funds receive income from two major sources. The first source is the Social Security payroll tax. In 2005, OASDI trust-fund income from the payroll tax (as well as a small amount of income-tax revenue paid from Social Security benefits received by higher-income retirees) is projected to total $596 billion.

The second major source of OASDI trust-fund income is interest income, which is earned each year on the trust-funds’ assets. In 2005, OASDI interest income is projected to total $94 billion. (Interest payments currently represent intragovernmental transfers that involve no net cash outlays.)

Thus, total OASDI income is estimated to be $690 billion this year. OASDI costs this year, almost entirely composed of payments to beneficiaries, are forecast to be $527 billion. The difference between total income ($690 billion) and costs ($527 billion) represents a 2005 trust-fund surplus of $163 billion.

However, because interest income is an intragovernmental accounting transfer, the trust funds’ cash-flow surplus in 2005 will only be $69 billion, which is the difference between payroll-tax revenue and costs. This is the amount that Congress and the administration will borrow to spend on other government programs this year.

For the 2005-2014 period, Social Security actuaries project that the cash-flow surplus will total $812 billion and that cumulative interest income will total $1.455 trillion. Therefore, the assets in the OASDI trust funds will rise by more than $2.2 trillion over 10 years.

In its March 25 editorial titled “$2.2 Trillion Down,” the Journal failed to distinguish between interest income and excess payroll-tax revenue. As a result, the editorial erroneously asserted that the $2.2 trillion “is the amount of payroll-tax revenue that workers will pay between now and 2014 that exceeds [emphasis in original] what will be spent over that same period” on beneficiaries.

In fact, payroll-tax revenues will exceed beneficiary payments by only a projected $812 billion for the 2005-2014 period. The trust funds’ interest income of nearly $1.5 trillion during that same period represents the cost of borrowing (and spending) both the previous cash-flow surpluses and the anticipated $812 billion cash-flow surplus.

The implication in the editorial was that the entire $2.2 trillion would be available to finance personal retirement accounts. But this is not the case. Nor is it the case that the full $2.2 trillion will be available to be spent on other programs, since nearly $1.5 trillion of it represents intragovernmental interest payments.

Annual cash-flow surpluses are expected to end in 2016, after which beneficiary payments (OASDI costs) are projected to exceed payroll-tax income. The federal government will have to finance those cash-flow deficits by either increasing the budget deficit through more borrowing; or by raising payroll- and/or general- (e.g., income-) tax revenues; or by reducing spending on other programs; or by pursuing a combination of these options. Measured in constant 2005 dollars, Social Security cash-flow deficits, once they begin to occur, will rise quickly, exceeding $100 billion in 2022, $200 billion in 2027 and $300 billion in 2034. Thus, the crisis is real. But misreporting it — and then failing to correct the errors — doesn’t contribute to its solution.

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