The Worsening Social Security Outlook: A Guide to the 2009 Trustees' Report

On Tuesday, May 12, the Social Security Trustees released their 2009 report.  The following summary of the report is intended for those already familiar with the basics of Social Security financing, and who are looking primarily to understand what is different about the 2009 projections relative to previous ones. 

In a nutshell, the story is this:  Social Security's finances are significantly weaker than foreseen even just a year ago.  Last year, the Trustees projected that the program would enter permanent cash deficits in 2017.  This year, that date has been moved forward slightly, to 2016.  Not since the 1983 reforms has the program been so close to operating deficits.  The projected Social Security insolvency date (of legal significance but less meaningful as a measure of the program's economic impact) has advanced by four years, from 2041 to 2037.

Focusing solely on these dates, however, downplays the true magnitude of the deterioration.  Social Security's near-term finances have taken a severe turn for the worse. Last year at this time, the Trustees foresaw a 2009 cash surplus of $87 billion. This year, they project a surplus of merely $19 billion: that is, over three-quarters of the previously projected surplus is now expected to be gone.  The 2010 surplus is projected to be smaller still.

What happened to the surplus? The biggest part of the story is that the weak economy has depressed payroll tax collections.  In addition, the program is paying out the largest COLA (5.8%) since 1982.

Disability claims are surging, as they often do in a down economy.  Last year, it was projected that the number of disability beneficiaries would rise by 240,000 from last year to this.  The updated projections show a rise of 380,000 – over 50% higher than foreseen.

Although the Trustees' "Intermediate scenario" does not project the program to enter permanent cash deficits until 2016, the report's stochastic analysis reveals another interesting, and somewhat sobering, finding:  the median projection is that program deficits will arrive in 2014. 

In other words, if the assumptions are allowed to vary this way and that, the 50th percentile of the various possible combinations shows deficits arriving another two years earlier than the particular combination of assumptions in the Trustees' Intermediate projection.   It is not typical of the Trustees' reports for there to be a two-year gap between the stochastic median and the Trustees' Intermediate projection.  The deficits are thus much more likely to arrive sooner than 2016 than they are later.

The stochastic analysis shows further how little likelihood there is that this adverse outcome will be averted without legislated reform.   There is an 80% probability that the program will enter permanent deficits sometime between 2010-2017.  There is a 95% probability that the program will enter permanent deficits between 2009-2019. 

Two particular aspects of this point are worthy of note.  One is the illustrative "Low-Cost" scenario – the sacred object of those who want to deny the reality of the Social Security shortfall – is not only outside the 95% confidence band of the projections, but that scenario is even less likely than that the program will be in deficit this year.  Perhaps this will at last put an end to the invocation of this absurdly unlikely scenario as a basis for ducking the hard policy choices before us.

The other item of note is that these updated numbers reflect very harshly on CBO's 2008 Social Security long-term projections report, in which CBO foresaw that the program would remain in cash surplus until 2019.  The Trustees' updated projections now show only a 2.5% chance of CBO's optimistic take coming to pass.

Over the long term, the Trustees' measurement of the 75-year actuarial imbalance has worsened by over 17%, from 1.70% of taxable payroll to 2.00% of taxable payroll.  Many experts do not believe this the most useful metric, finding that it understates the true shortfall in various ways (under the methodology employed at the time of the 1983 reforms, the long-range deficit is now 2.99% of payroll – much bigger than the 1983 reforms themselves addressed.)  That even the 75-year actuarial imbalance metric has worsened by so much, however, is a concerning indicator.

For perspective, consider that only in three previous Trustees' reports since the 1983 reforms (1985, 1992 and 1994) has the 75-year actuarial imbalance worsened as much, as a percentage of national wages.   This year's actually might be the worst "real" deterioration of all.  In 1985, the Trustees were implementing methodological corrections to some errors that had been made in 1983.  In the early 1990s, the Trustees were generally shifting to more conservative assumptions than the overly-rosy 1983 assumptions.   None of those factors exist today: this is a pure, real worsening of the outlook – not a methodological one.  Moreover, it is occurring much later in the game, when our choices are already much more difficult.

What has caused the long-term picture to look so much worse?  Again, the biggest factor is economics -- incorporating the worsened economic data that has arrived since last year. The Trustees' long-term economic assumptions have not been revised downward; this is a consequence primarily of slower growth that has already occurred.  In addition, some updated longevity data has added significantly to the long-range deficit.   Finally, the passage of another year without legislated reform has added to this measurement of the shortfall as well.

Taken together, the Trustees now project that the cost of paying full Social Security benefits will rise from 12.35% of taxable worker wages today to 17.11% by 2036.  The benefit cuts threatening retirees in 2037 amount to 24% of their benefits.

Remember all of those advocacy pieces saying that there was no entitlements problem, no Social Security problem, but only a health care problem?  Guess what:  Social Security costs are rising this year by more ($57 billion) than all of the components of Medicare combined ($43 billion.)  Medicare certainly has the greater long-term shortfall, but in the near-term, Social Security's cost growth is just as great an issue as Medicare's.

The total effect of the worsened Social Security outlook is to severely constrain the choices facing policymakers as well as the time during which they need to be made.  If we act soon, we can fix program finances, without cutting benefits for those in retirement, without imposing real declines in future benefit levels, and even without raising taxes.  But the window for avoiding these tough choices will close in just a few more years.

The release of these sobering numbers is prompting new calls for reform, including welcome comments by policy makers at either end of Pennsylvania Avenue.  Unfortunately, delay in fixing the program had already exacted a heavy price.  Now, a worsened economy has added still more to the cost of our failure to address Social Security. 

The public has been ill-served by those who have groundlessly minimized the Social Security shortfall.  The current wake-up call is coming too late to allow for a Social Security fix as benign as the one that could have been enacted years ago.  It is still the case, however, that we will get a better solution and a more effective Social Security program if we act sooner rather than later.