Social Security: No 'phony' crisis

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The capacity for self-delusion about the impending Social Security crisis seems to be bipartisan. Connecticut Republican Rep. Rob Simmons, a third-term moderate who won his 2004 race with 54 percent of the vote, recently questioned the need for President Bush even to begin pursuing reform. "Why stir up a political hornet's nest ... when there is no urgency?" Mr. Simmons asked, according to a front-page account in The Washington Post last month. "When does the program go belly up? 2042. I will be dead by then."

From the left, in a January essay appearing in The Post and appropriately headlined "What Crisis? It Ain't Broke, So No Need To Fix It," Mark Weisbrot and Dean Baker, co-directors of the liberal Center for Economic and Policy Research, argued that "the Social Security program can pay all promised benefits for the next 38 years -- with no changes at all." Co-authors of "Social Security: The Phony Crisis," Messrs. Weisbrot and Baker conclude: "The impending crisis of Social Security is a myth."

In the midst of this delusional experience affecting at least part of the GOP and the vast majority of congressional Democrats, Federal Reserve Chairman Alan Greenspan recently traveled to Capitol Hill. In his initial remarks on Social Security before the House Financial Services Committee, Mr. Greenspan concluded: "So, I think this is an extraordinarily important problem."

As the Social Security reform debate has unfolded since the election, the focus has been on two key dates: 2018 (when Social Security's cash-flow surplus will turn into a cash-flow deficit) and 2042 (when the Social Security trustees estimate that the "assets" in the Social Security Trust Fund will be exhausted). But Mr. Greenspan argued that the "extraordinarily important problem" will actually begin much earlier than 2018. Specifically, the Fed chairman focused on 2008, when "roughly 30 million people are going to leave the labor force over the next 25 years and enter into retirement." The result will be "a very significant slowing in the rate of economic growth because, obviously, the rate of growth of the working-age population relative to the total [population] goes down."

Perhaps not so coincidentally, 2008 will also mark the year in which Social Security's cash-flow surplus (the amount by which Social Security tax revenues exceed benefit payments) will peak. That is not a development that is taken lightly by congressional budget committee members. In a recent meeting with the editorial page of The Washington Times, Ohio Rep. Rob Portman, a de facto member of the House Republican leadership and a member of both the Budget Committee and the Ways and Means Committee, emphasized that budget policy-makers were keenly aware that Social Security's cash-flow surplus begins to decline after 2008 (before it turns into an outright deficit 10 years later).

Like Messrs. Greenspan and Portman, Robert Pozen, a member of the 2001 President's Commission to Strengthen Social Security, also recently stressed the need to begin addressing Social Security's problems in the immediate term. At a Brookings seminar last month, Mr. Pozen cogently argued that "once you get to 2008, that means that the whole baby-boom generation is close to retirement. You will never be able to change any benefit formula or any aspect of those people's Social Security."

Now, it is true that the Social Security trust fund today contains nearly $1.7 trillion in Treasury bond assets, which are backed by the full faith and credit of the U.S. government. And it is true that those Trust Fund assets are projected to total $6.6 trillion 20 years from now.

How can it be that the trust fund can hold Treasury bond assets totaling $1.7 trillion today and a projected $6.6 trillion 20 years hence, on the one hand, and yet Social Security can still face a cash-flow crisis by 2018 and a solvency crisis by 2042 and beyond, on the other? There are two problems here: the longer-term solvency issue and the shorter-term cash-flow problem.

The simple answer to the solvency question is that the trust fund assets must be measured against Social Security's liabilities, which are represented by the program's benefit commitments. And the long-term liabilities dwarf the program's assets. According to the 2004 Old Age, Survivors and Disability Insurance Trustees Report, the projected present value of 2004-2078 benefit payments totals $32.9 trillion. The projected present value of 2004-2078 payroll-tax revenue and taxation-of-benefits revenue totals $27.7 trillion. The difference is a 75-year present-value shortfall of $5.2 trillion. Deduct from this total the $1.5 trillion in assets in the trust fund as of Dec. 31, 2003; and Social Security's present-value shortfall (i.e., its unfunded liability) totals $3.7 trillion. Demonstrating that Social Security's problems significantly worsen beyond the next 75 years, the trustees calculated a present-value unfunded liability of $10.4 trillion over the infinite horizon.

The answer to the question of the cash-flow shortfall, which begins in 2018, is equally direct: 2018 will be the first year that benefit payments will exceed the revenue from payroll taxes and the taxation of benefits. Thus, the only way "the Social Security program can pay all promised benefits for the next 38 years" (Messrs. Weisbrot and Baker's words) will be to cover a Social Security cash-flow shortfall of $12 trillion between 2018 and 2041. (Adjusted for inflation and measured in 2004 purchasing power, the 2018-2041 cash-flow shortfall will total $5.5 trillion.) So, the crisis is not a myth.