The Washington Post reports that recession puts a major strain on Social Security trust fund.
(emphasis mine) [my comment]
Recession Puts a Major Strain On Social Security Trust Fund
As Payroll Tax Revenue Falls, So Does Surplus
By Lori Montgomery
Washington Post Staff Writer
Tuesday, March 31, 2009
The U.S. recession is wreaking havoc on yet another front: the Social Security trust fund.
With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund's annual surplus is forecast to all but vanish next year -- nearly a decade ahead of schedule -- and deprive the government of billions of dollars it had been counting on to help balance the nation's books.
While the new numbers will not affect payments to current Social Security recipients , experts say, the disappearing surplus could have considerable implications for the government's already grim financial situation.
The Treasury Department has for decades borrowed money from the Social Security trust fund to finance government operations. If it is no longer able to do so, it could be forced to borrow an additional $700 billion over the next decade from China, Japan and other investors. And at some point, perhaps as early as 2017 [This year if US keeps losing jobs at the current pace], according to the CBO, the Treasury would have to start repaying the billions it has borrowed from the trust fund over the past 25 years, driving the nation further into debt or forcing Congress to raise taxes.
The new forecast is fueling calls for reform of the Social Security system from conservative analysts, who say it underscores the financial fragility of a system that provides a primary source of income for millions of Americans.
"It suggests we better get working on Social Security and stop burying our heads in the sand," said Sen. Judd Gregg (N.H.), the senior Republican on the Senate Budget Committee. "The Social Security trust fund, though technically in balance, is going to put huge pressures on taxpayers very soon."
Many liberal analysts reject the notion that Social Security needs fixing, arguing that the system is projected to fully support payments to beneficiaries through 2041 -- so long as the Treasury repays its debts [and the dollar maintains its value]. But they agree that the news is not good for the federal budget.
"This is not a problem for Social Security, it's a problem for fiscal responsibility," said Christian Waller, a public policy professor at the University of Massachusetts at Boston and a senior fellow at the Center for American Progress. He said the new estimates would force President Obama and his budget director, Peter Orszag, "to stay on track in what they have set out to do, and that is rein in deficits."
The CBO, Congress's nonpartisan budget scorekeeper, released its most recent estimates for the Social Security trust fund last week as part of its final budget projections for the fiscal year that begins in October.
The trust fund has long taken in more in revenue from payroll taxes and other sources than it pays out in benefits. Last August, the CBO predicted that surplus would exceed $80 billion this year and next, then rise to around $90 billion before slowly evaporating by 2020. But the rapidly deteriorating economy -- particularly the loss of more than 4 million jobs -- has driven those numbers much lower much faster, with the surplus expected to hit $16 billion this year and only $3 billion next year, then vanish entirely by 2017.
CBO is not the official arbiter of the trust fund's health; that task falls to the Social Security trustees, a panel of Cabinet secretaries and others who are expected to issue a new report later this spring. In his budget, Obama predicted that the trust fund surplus would hit $30 billion this year, according to Mark Lassiter, a spokesman for the Social Security Administration.
But that number, too, is far less than the $80 billion the trustees had forecast for 2009. In addition to declining revenues, Lassiter said the system is likely to incur higher expenses due to big jumps in new retirement and disability claims. Both are expected to rise by at least 12 percent this year compared with 2008.
"There are some people who are, in fact, delaying retirement" because the plunging stock market took a huge bite out of their retirement accounts, Lassiter said. "But the stronger trend is that people who are losing a job are looking for other sources of income. And if you're of retirement age, you're going to go ahead and file for Social Security benefits."
Though Obama has pledged to address the precarious financial situation of Social Security, the administration currently has no plans to do so [Not really his fault. There is no way "to address the precarious financial situation of Social Security"]. Under pressure from congressional Democrats who argued that Social Security should not be at the top of the new administration's agenda, the White House last month dropped a proposal to name a task force to reexamine the program.
During the campaign, Obama proposed applying payroll taxes to annual earnings over $250,000 help fund Social Security after the surplus vanishes. With the new numbers, some analysts said, the president might be forced to step up the timetable.
"Over the past 25 years, the government has gotten used to the fact that Social Security is providing free money to make the rest of the deficit look smaller," said Andrew Biggs, a resident scholar at the American Enterprise Institute. "Now they've essentially got to pay their own way, at least a little more fully.
"Instead of Social Security subsidizing the rest of the budget," he said, "the rest of the budget will have to subsidize Social Security."
The Washington Post reports about Social Security trust fund projections.
Trust Fund Projections
Due in large part to rising unemployment, the surplus in the Social Security Trust Fund is expected to almost disappear next year, forcing the government to borrow even more money from other sources.
SOURCE: Congressional Budget Office By Tobey - The Washington Post - March 31, 2009
My reaction: The US recession is wreaking havoc on the Social Security trust fund. If the unemployment keeps rising, the Social Security surplus could turn into a deficit this year, further straining the national budget.
1) Due to the deteriorating economy and rising unemployment, the payroll tax revenue which funds Social Security benefits for nearly 51 million retirees is falling.
2) In addition to declining revenues, the system is incurring higher expenses due to big jumps in new retirement and disability claims.
3) The CBO, Congress's nonpartisan budget scorekeeper, expects the Social Security surplus to hit $16 billion this year and $3 billion next year.
4) The Treasury Department has for decades borrowed money from the Social Security trust fund to finance government operations.
"Over the past 25 years, the government has gotten used to the fact that Social Security is providing free money to make the rest of the deficit look smaller. Now they've essentially got to pay their own way, at least a little more fully. "
5) If it is no longer able to count on Social Security surpluses, the Treasury would have to start repaying the billions it has borrowed from the trust fund over the past 25 years, driving the nation further into debt or forcing Congress to raise taxes.
"Instead of Social Security subsidizing the rest of the budget, the rest of the budget will have to subsidize Social Security."
6) The system is projected to fully support payments to beneficiaries through 2041, as long as the Treasury repays its debts and the dollar maintains its value.
"It suggests we better get working on Social Security and stop burying our heads in the sand. The Social Security trust fund, though technically in balance, is going to put huge pressures on taxpayers very soon."
7) The rapidly deteriorating economy -- particularly the loss of more than 4 million jobs -- has driven those numbers much lower much faster
8) In his budget, Obama predicted that the trust fund surplus would hit $30 billion this year
Conclusion: As I wrote in my entry, *****Fed Planning 15-Fold Increase In US Monetary Base*****, the accumulation of treasuries by government retirement funds is over.
Retirement inflows into treasuries are over
The steady accumulation of treasuries by government retirement funds has helped absorb the supply of treasury bonds for nearly three decades. This accumulation of government debt to secure the retirement of baby boomers helped drive down treasury yields and fund deficit spending. As of September 2008, the four biggest of these funds held 3.3 trillion treasuries:
2150 billion (Federal old-age and survivors insurance trust fund)
615 billion (Federal employees retirement fund)
318 billion (federal hospital insurance trust fund)
217 billion (federal disability insurance trust fund) (for more on these four funds, see where social security tax amounts are deposited)
3300 billion total
Today, the accumulation of treasuries by government retirement funds is over. Baby boomers are beginning to retire, increasing outflows, and unemployment is rising, cutting inflows. More importantly, the 3.3 trillion already accumulated in these funds provides an enormous political incentive to prevent treasury prices from collapsing. Faced with a run on treasuries, politicians, rather than explaining to baby boomers that their retirement savings are gone, will instruct the fed to monetize treasury bonds. This alone will prevent the fed from reversing its current balance sheet expansion.