>This is kind of a long post, so I hope you’ll bear with me.
Part of the issue in the Social Security debate is a lack of consensus on the severity of the problem. There are two key dates to have in mind when discussing Social Security:
2018+/-2 years is when the Social Security benefits are higher than the payroll taxes collected.
Benefits are paid to the elderly, disabled, or survivors, and the money comes from a payroll tax of about 12.6% on the first approximately $100,000 in wages. Currently, the taxes collected are about $200B more than benefits, the extra is saved in a trust fund (we’ll come back to this later).
2040+/-2 years is when the trust fund should be depleted of all the saved excess payroll taxes and interest. By law, at this point the benefits must be cut to balance taxes collected.
What does it really mean to say that the extra is saved in a trust fund? There’s two ways of looking at this:
The first way is to look at the government as a whole as a black box, with inputs and outputs. All taxes go in (income, social security, excise, etc.), and all spending goes out (military, social security benefits, infrastructure projects, etc.). What’s left over to be paid is the Unified Deficit, and it’s the number you see in the newspaper. Right now it’s about $340B for 2007, and the government has to find lenders for that money. Foreign lenders like China, Oil producing nations, pension funds, and individuals like your Aunt Madge buy these because they pay interest and are super-safe. Note that the social security trust fund doesn’t enter the picture, because it’s just one portion of government (Social Security) lending its revenue to another portion (General Government).
The consequence of this viewpoint is that the trust fund is only significant in the year 2040, when benefits have to decrease. From the outside, social security taxes and benefits are not linked to each other by law until 2040. This is consistent with the trust fund being treated as”fake”.
The other way to look at this is to look at the Social Security side by itself. This one is more self explanatory. If you look at it this way, the deficit number reported in the Newspapers should be higher by about $190B for 2007 since the General Government side has to borrow that amount to pay the bills, and the National Debt number reported (about $9.3T) should be higher by the amount in the trust fund now, about $2.5T. Then the trust fund would be treated as real because the key numbers reported and debated include the result of the trust fund.
So the data reported for deficit and debt is consistent with the trust fund being treated as fake, but we’re not obligated to do anything about it until all the fake money is gone.
My conclusion is that since the trust fund is treated as fake, the timing of the problem is soon, if not now, rather than 30 years from now.
Sources: President’s budget 2009, SSA.gov, Concord Coalition’s Fiscal Responsibility Tour slides.