Are we $26 trillion in the
hole on Social Security? Or is it just $4.0 trillion? It is
difficult to make sense of all the numbers floating around as
people discuss Social Security reform. To do so, one needs to
understand just what the most-cited measures of Social Security's
future burden really mean.
(Updated on May 6,
2005, to 2005 numbers.)
Total Cost vs. Net Present
Value
Before plunging into the
numbers, it makes sense to take a step back and think about what
they actually represent. There are two ways to express the
government's future obligations in terms of today's money: net
present value and total payments.
Net present
value estimates represent the
amount of money the government would need to have on hand and
invested today in order to make Social Security solvent. This lump
sum and its accrued interest earnings would be used (along with
Social Security payroll taxes) to pay future benefits.
Net present value is a
financial measure that is commonly used to evaluate long-term
financial decisions on a comparable basis: A family, for example,
could think of the initial size of its home mortgage as
representing the net present value of the loan. As a practical
matter, however, the federal government should not invest in the
private market in order to accumulate earnings. Additionally, it is
difficult for the government to stash away funds for the future.
For example, what happened to the decades of surplus Social
Security income? Congress spent it.
Total payment
estimates represent
what the government will pay for Social Security benefits, putting
just enough money into the system every year to be able to make its
promised benefit payments to Social Security recipients. A total
payment estimate, then, represents the sum of a stream of future
payments, all adjusted for inflation into current dollars. A family
could equate that number to the total of all the monthly payments
they will make to retire their mortgage.
How Much
Red Ink?
The numbers
in this section all represent different ways of measuring and
talking about Social Security's future shortfall. All are derived,
in one way or another, from the annual Social Security Trustees'
reports.
$4.0 trillion
: This is the net present
value of Social Security's unfunded obligations through 2079. In
other words, this is the amount of money that the government would
need to have on hand and invested today so that it could make
Social Security solvent when combined with the Trust Fund bonds and
future payroll taxes. This would balance out the program's future
deficits so that it could fully pay promised future benefits though
2079.
This number (the technical
name for which is the "75 year unfunded obligation net present
value-trust fund perspective") is misleading in three
ways:
-
It does not
account for the cost of repaying the Trust Fund bonds from 2017,
when the system begins to run deficits, until 2041, when the Trust
Fund is exhausted. This money will have to come from general
revenues via higher taxes, increased borrowing, or huge spending
cuts elsewhere.
-
It extends only
through 2079, although the Social Security Administration projects
deficits beyond that date.
-
It is the amount
of money that is needed today, right now, to close the program's
shortfalls; every year's delay in fixing Social Security costs a
year of investment and compounding, increasing the cost of Social
Security in net present value terms.
For these reasons, this
number is a deceptively small measure of Social Security's future
burden.
Still, Social Security is
in bad enough shape that even the small numbers are enormous. The
relatively small $4.0 trillion estimate of Social Security's future
burden is still nearly four times the value of all individual
federal income tax receipts from 2003.
$5.7 trillion
: This is the net present
value of Social Security's cash-flow shortfall through 2079. In
other words, this is the amount of money that the government would
need to have on hand and invest today so that it could pay Social
Security's promised future benefits through 2079 and pay
back $1.7 trillion for the Trust Fund's bonds.
Still this number extends
only through 2079 and represents the amount of money that the
government would need to collect and invest today. It is more than
twice as big as the entire federal budget and is often referred to
as the "75 year shortfall net present value-budget
perspective."
$5.0 trillion
: This is the sum of the
payments, in 2004 dollars, that the government will have to repay
to the Trust Fund between 2017, when Social Security's cash flow
goes negative, and 2041, when the Trust Fund's bond holdings are
finally spent. In other words, this is the total cost to keep
Social Security going even before the Trust Fund is
empty.
Without any changes in
Social Security, these payments will come out of general revenues
via higher taxes, increased borrowing, or spending cuts elsewhere.
So what's wrong with this number? It doesn't account for Social
Security's deficits after 2041. This number is called the "sum of
trust fund payments."
$12.8 trillion
: This is the net present
value of Social Security's cash-flow shortfall: in other words, the
amount of the money that the government would need to collect and
invest today so that it could pay Social Security's promised future
benefits forever. This estimate uses a controversial infinite
time-horizon. On the one hand, it doesn't ignore what happens after
2079. But on the other hand, it is an uncertain business to project
so far into the future.
Like other
budget-perspective estimates of Social Security's burden, this
number represents the amount of money that the government would
need to invest today to pay back the Trust Fund and fill the future
shortfall. Excluding these Trust Fund payments, this measure drops
to $11.1 trillion, the
number that the President often cites to describe Social Security's
future burden.
Though an imprecise
exercise, projecting Social Security's shortfall so far into the
future does illuminate several points. First, the difference
between this measure and the analogous 75-year budget-perspective
shortfall is $7.1 trillion. In other words, assuming standard
returns, it is the amount of money the government would have to
have on hand and invest today, and not touch at all for 75 years,
and then use starting in 2080 to cover promised benefits. This
demonstrates the danger of relying on estimates that stop short in
2079 and look no further.
The enormity of this
number leads to a second point. Small changes in Social Security,
such as have been made in the past and such as some propose now,
are not enough to put the program on a permanently stable footing.
At best, small changes push the problem of Social Security's
financing into the future. This number is as big as the entire U.S.
economy and is often referred to as the "infinite time horizon net
present value."
$25.8 trillion
: This number is Social
Security's total negative cash flow through 2079, in 2004 dollars.
It does not account for Social Security's continuing shortfalls
after 2079. Still, this number fairly represents, in today's money,
the future stream of payments that will be required to fill the
deficits so that Social Security can make its promised benefit
payments through 2079.
Moreover, without reform,
those payments will have to be made up somehow: from higher taxes
than under current law, spending cuts elsewhere, more borrowing, or
lower benefits. This number is more than six times the total
federal debt held by the public and is called the "sum of the
deficits."
Conclusion
An understanding of Social
Security's future burden makes the need for reform all the more
apparent. Specifically, it demonstrates clearly the great value of
reform that would retire more than $25 trillion in future deficit
expenses while also protecting the benefits of today's seniors and
helping families to build nest eggs.
While each of the
different ways of measuring Social Security's future burden tells
us different things about the program's future costs, they all
reveal the huge problems that Social Security faces if it is not
reformed soon. By any measure, Social Security's burden is heavier
than we can conscionably pass on to our children and
grandchildren.
Andrew Grossman is Senior
Writer and Editor at The Heritage Foundation.