Pushing the Analysis Deeper on Social Security
I have been feeling quite smug the last few years, since I knew that the projections of the date at which Social Security “runs out of money” were wildly optimistic. The latest projection is 2036, but that relies on the mythical “trust fund.” The true crisis point occurs much earlier, when payroll taxes put in less money in a given year than Social Security recipients are due in payouts. At that point, the Social Security Administrator has to start drawing down the “trust fund,” which of course is nothing but a pile of IOUs from the Treasury. Thus, taken as a whole, the federal government will have a higher deficit (because of Social Security) starting at that much earlier date, which the latest forecast puts at 2016–a mere seven years away!
But Robert Wenzel does me one better. The actual crunch is already underway, because the annual surpluses from Social Security are shrinking. (We know that they are projected to fully shrink to zero by 2016.) In a sense, it’s as if the Social Security program were a separate country that ran enormous trade surpluses with the US every year since the 1930s, and used the proceeds to invest in US Treasurys. But now–just like China–that country is backing away from purchasing ever more federal debt. Other things equal, as the net additions to the trust fund continue to shrink over the next seven years, the pressure will increase on US interest rates.
If you keep going cross-eyed with he Social Security / Treasury distinction, just drop all of that and realize that the government has a certain flow of revenue coming in, due to both income taxation as well as Social Security taxes, er, contributions. On top of that, the government has a certain flow of spending that it has already committed itself to, in the form of Social Security (and Medicare etc.) payments. As the years pass, the promised flow of payments is rising more quickly than the automatic flow of revenues. Hence, other things equal, the federal budget deficit will rise because of these demographic shifts.
I’ll conclude by quoting Wenzel:
Currently, Social Security buys approximately 25% all Treasury securities issued. Who is going to make up for that shortfall, especially since Social Security will not only stop buying, but will be a net liquidator? It’s not going to be the other major Treasury security player, the Chinese. They are trying to slow their purchases now. So in addition to the Social Security and Medicare crisis for the elderly, this funding crisis will have a major impact on Treasury funding above the 81% increase in Social Security and Medicare that Bartlett has identified.
That light you see at the end of the tunnel is a train heading toward us, soon you will hear it roar.
