Social Security's mammoth shortfall lies ahead

by Scott Burns | Posted May 07, 2003

The devil, they say, is "in the details." So it is with our government. It has a habit of telling the truth in the fine print of seldom-read documents.

That way, the politicians can say they told us - but no one listened. The recently issued report from the Trustees for Social Security is a good example. It quietly tells us that the true liabilities of Social Security are $7 trillion larger than conventionally reported.

The executive summary tells us that payments will exceed tax revenue by 2018. It also tells us that the estimated 75-year deficit has worsened slightly, from 1.87 percent to 1.92 percent of payroll. Ho-hum.

Every worker in America has already received similar information from Social Security commissioner Jo Anne Barnhart. It came as part of your annual statement in which Barnhart mentioned, in the fifth paragraph, that the program would begin paying more in benefits than it collects in taxes by 2018.

Furthermore, benefits will have to be cut 27 percent by 2041 unless something is done. Don't believe me? Read your statement. That, believe it or not, is the good news.

In fact, the situation is far worse.

Here's the story. Since 1965, the trustees have examined the long-term health of Social Security retirement and disability programs by making a 75-year estimate of income and expenses. It works to understate funding problems - it includes tax revenue from some workers but excludes some of their retirement benefits.

As a consequence, it routinely understates the imbalance between revenues and benefits. Using the traditional (executive summary) measure, Social Security has a 75-year revenue shortfall equal to 1.92 percent of payroll. That's about $3.5 trillion in today's dollars.

To provide full benefits, employment taxes would have to be increased - immediately - to avoid the benefits cut Barnhart warns of. This year, however, the trustees' report includes two additional measures that are more accurate. They don't shove some liabilities beyond the 75-year horizon.

Guess what happens? The revenue shortfall triples to a present value of $10.5 trillion.

Here are some ways to think about it:

If the real shortfall is three times the traditional measure, which is 1.9 percent of payroll, then the true payroll tax shortfall is 5.7 percent of payroll. This requires an immediate 46 percent increase in the portion of the payroll tax dedicated to retirement and disability income. A worker's share of the tax, currently 6.2 percent of the first $87,000 of earnings, would increase to 9.05 percent. Employers would experience the same increase.

Measured another way, the $7 trillion increase is about the same as our total home equity ($7.6 trillion). If we just surrender our homes to Washington today, they can make good on the promises that have been made. Toss in every dime we have in mutual funds, about $2.6 trillion, and we'll cover the entire $10.5 trillion shortfall.

The $7 trillion increase is greater than the so-called "national debt," the formal debt owed by the U.S. Treasury. As of April 24, its obligations totaled $6.46 trillion. Of that, $1.38 trillion was held in the Social Security trust fund at the end of 2002. When it comes to illusion and obfuscation, government accounting makes the crew at Enron look like Boy Scouts.

(c) 2003, Universal Press Syndicate