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Social Security's Decline Moves Closer

By Allan Sloan
Tuesday, May 9, 2006

This is the season of renewal, with flowers blooming everywhere and plant allergens wafting through the air. Gesundheit! But for Social Security junkies, this is the time to pore over Social Security's newest annual trustees report.

The 2006 report, issued last week, seems largely unchanged from last year. Social Security is still projected to start taking in less cash than it spends in 2017 and to exhaust its trust fund in 2040, rather than in 2039.

But things are actually worse than last year, because crunch time -- when the program starts running a cash deficit -- has crept a year closer. Examine this report dispassionately and you see future cash shortfalls so immense that there's no realistic way to cover them. Cash is what matters, because Social Security's multitrillion-dollar trust fund, consisting of IOUs from the U.S. Treasury, won't help the federal government cover shortfalls when the program begins taking in less than it spends.

The shortfalls are projected to start at about $11 billion in 2017. If they stayed at that level, it wouldn't be any problem. Hey, the government's cash deficit is running around $300 billion a year. What's $11 billion more a decade from now?

The problem is that the cash drain mounts so rapidly that it's hard to imagine my twenty- and thirtysomething children and their cohorts agreeing to cover it indefinitely. Nor should they. Horrible as it may seem to the old-age lobby, the government has obligations to people other than us geezers.

Now, to the numbers. Because there's no table that shows Social Security's year-by-year cash flow, we have to calculate it ourselves. We do that by going to Table VI.F8, buried deep in the trustees report, and doing some simple arithmetic. We're using a special, detailed version of that table, which is available only online at http://ssa.gov/OACT/TR/TR06/lr6F8.html .

Okay, you've got the table. Now, subtract the "cost" number from the "income excluding interest" number and -- voila! -- you've got Social Security's cash flow.

I'm excluding interest because I don't consider it useful. That's because rather than getting cash interest, the Social Security trust fund gets Treasury IOUs as interest payments on the Treasury IOUs that it owns. But as we'll see, those IOUs don't cushion the pain of Social Security's future cash shortfalls.

And absent a change, those shortfalls are coming. Social Security's cash surplus has helped finance the rest of the government for more than 20 years, but that party will soon start winding down. The cash surplus, $76 billion this year, peaks at $93 billion in 2008, declines slowly, then rapidly.

In 2021, a mere 15 years from now, cash is negative to the tune of $128 billion. For the economic purists among us, that's equivalent to $85 billion in today's dollars -- think of it as adding another Iraq and Afghanistan to the budget. (The today's-dollar numbers are from table VI.F7, which you find by changing the 8 in the aforementioned URL to a 7.) In 2025, the cash deficit is $284 billion -- that's 169 billion current dollars. Call it two Iraq-Afghanistans. And then things get worse.

In 2026, the trust fund is still growing, peaking at close to $6 trillion. On the surface, things are great. But that year, Social Security will pay out $329 billion ($191 billion today) more than it takes in. Yechhh.

From there, the numbers become simply horrendous, peaking at $902 billion ($365 billion today) in 2039, the year before the trust fund's balance goes negative.

But won't the trust fund allow Social Security to keep paying full benefits until 2039? Actually, it won't, because despite its heft, the trust fund doesn't generate any cash to cover the shortfalls. When Social Security has to get $11 billion from its trust fund in 2017 or $284 billion in 2025, it will cash in some Treasury securities. But to get the money to redeem those securities, the Treasury will have to tax more, spend less or borrow more. That's exactly what the Treasury would have to do to keep Social Security checks from bouncing if there were no trust fund. So what use is the trust fund? None.

What do all these numbers tell us? That Social Security isn't in crisis today -- but that it does have a long-term problem.

If nothing changes by next year's trustees report -- which, unfortunately, is likely to be the case -- the long-term problem will be a year closer than it is now. I'm betting on being able to write this same column next May, with nothing changing except a few of the numbers. Happy spring. And happy allergens to all of you.

Sloan is Newsweek's Wall Street editor. His e-mail issloan@panix.com.

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