Social Security Deficit Increases by Trillions

March 24, 2003

The annual report from Social Security's Board of Trustees outlining the financial status of the Social Security program was released March 17. Michael Tanner, director of the Cato Institute's Project on Social Security Choice, says:

"This year's report reinforces what we already know: that Social Security faces massive long-term deficits and needs to be reformed, and the sooner the better. With each passing year Social Security's multi-trillion dollars deficits increase and the cost of fixing the system rises."

"Focusing solely on Social Security's finances ignores other important issues that reform must address, including the lack of a legal right to benefits, and discriminatory treatment of working women, divorced individuals, younger workers and low-wage/minority workers with shorter life expectancies. Nevertheless, the Trustees Report proves again that Social Security reform needs to be on the agenda."

Following are highlights of the findings of the 2003 Trustees Report:

What are Social Security's total cash deficits? Social Security's net cash shortfall over the next 75 years totals $25.33 trillion in 2003 dollars, a $1.46 trillion increase from the 2002 report. That figure assumes today's surpluses are saved; if surpluses are not saved, then from 2018 through 2077 Social Security faces gross cash deficits of $26.40 trillion (in $2003), an increase of $1.37 trillion from the 2002 report.

When do cash deficits begin? In the 2003 report, cash deficits began in 2018, a delay of one year from the 2002 report. Once payroll taxes are no longer enough to pay scheduled benefits, the government must produce extra cash – either to redeem the bonds in its Trust Fund or to pay benefits directly. The multi-trillion dollar cost to the government of redeeming these bonds would require tax increases or reductions in non-Social Security programs.

When is the Trust Fund exhausted? In the 2003 report, the Trust Fund is projected to be exhausted in 2042, an increase of one year from the 2002 report. Trust Fund bonds can't themselves pay for benefits, since the government must come up with cash to repay them. However, the Trust Fund exhaustion date is still important: when the fund's bonds are exhausted then, by law, Social Security must cut benefits by 27 percent to the level payable through Social Security's dedicated tax revenues.

What's new in the 2003 Report? This year the Trustees measure Social Security's cash shortfalls not simply over 75 years but in perpetuity, which increases the present value unfunded liability from $3.5 trillion to $10.5 trillion (plus the trillion-dollar cost of redeeming the Trust Fund's bonds). Only personal account reform proposals have been shown by Social Security's actuaries to make Social Security solvent permanently. More importantly, measuring deficits in perpetuity removes a significant methodological bias against personal retirement accounts. A truncated scoring period counts taxes paid into accounts during the period but ignores benefits paid after the period ends, adding trillions to the apparent "cost" of a personal accounts proposal.

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