Fiscal reform has become a hot topic in Washington as spending hits all-time highs and Congress and the President continue to push several new high-ticket items closer to law. Lawmakers and concerned citizens alike are shifting focus to the looming fiscal crisis that will be caused by from entitlement spending on the Medicare, Medicaid, and Social Security programs. But for Social Security, that red ink isn’t so far off in the future—in fact, it’s scheduled to arrive in 2010.
In the Washington Post, business columnist Allan Sloan highlights a report from the Congressional Budge Office (CBO) which confirms that in 2010, Social Security outlays will exceed revenue for the first time in 25 years. The CBO report shows that Social Security will earn $120 billion in interest on its trust fund, which would seem to cover its $92 billion surplus. Not so. As Sloan explains, the interest does not constitute funds with which to pay benefits. It is nothing more than IOUs from the Treasury.
The CBO report shows decreased deficits for 2011 and 2012, with Social Security breaking even thereafter. But as The Heritage Foundation has warned, by 2016 Social Security will begin running permanent deficits.
This latest twist on Social Security’s financial shortcomings is attributable to the recent economic downturn. Revenues dwindled as Americans lost their jobs, reducing tax collections. This effect is compounded by the greater number of Americans forced into early retirement and newly dependent on the Social Security program.
Social Security benefits will not be reduced in response to the deficit. Rather, taxpayers will make up the difference, via aid from the Treasury, in order to keep benefits checks from bouncing. The early arrival of the need for a Social Security bailout should serve as a severe reminder to the Obama Administration that entitlement reform is needed now to ensure a sustainable economic future for the country. And yet, the President’s recently published 2011 Budget does nothing to address this growing problem. Spending on Social Security, Medicare, and Medicaid continue to eat up a major portion of federal funds with no serious reform efforts in sight.
According to Heritage expert David C. John, there are ways in which Congress and the President could provide short-term solutions to fix Social Security. These include reducing benefits, increasing retirement savings, and raising taxes. The first two solutions are the most promising, but would not immediately produce reversals in spending as such changes would have to be phased in, since it would be infeasible to change benefit structure for current retirees or those close to retirement. As for the last idea, politicians should steer clear of raising taxes to cover short-term Social Security deficits, as this merely delays more substantial change and is an insufficient long-term solution.
As Sloan writes, “Until this year, Social Security was a problem for the future. Now it’s a problem for the present.” Hopefully the President gets the message and pursues the necessary measures to properly address this event.