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Social Security: Downturn Does NOT Affect Long-Run Picture

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Tuesday 12 May 2009
Visit article original @ The Center for Economic and Policy Research

The 2009 Social Security Trustees Report shows a considerably worse short-run picture and slightly worse long-run picture than the 2008 report. In the short-run, the annual surplus of taxes over benefits is projected to be just $18.8 billion in 2009 and $18.3 billion in 2010. This compares with projected surpluses of taxes over benefits from the 2008 report of $87.1 billion for 2009 and $82.7 billion for 2010. (It is important to note that the Trust Fund is projected to collect $238 billion in interest on government bonds in these years, in addition to its tax revenue.)

It is not surprising that Social Security's annual financial picture deteriorates in a downturn. This is entirely predictable and in fact desirable. Social Security's tax revenues fall as workers lose their jobs.

Almost two-thirds of the reduced surplus this year is due to an unusually large cost-of-living increase for 2009. The latest adjustment accounts for last year's rise, but not the fall in oil prices. Though continuing benefits are automatically adjusted for inflation, this year Social Security will be paying a 6.9 percent larger real benefit to retirees, disabled workers and their families.

In this way the program provides income security to households and acts as an important stabilizing force in the economy. Social Security would be a much less effective program if its annual finances did not deteriorate when the economy went into a slump.

This short-term falloff in revenue has a relatively limited effect on the program's finances as indicated by the limited movement in the projected date of the Trust Fund's depletion (from 2041 to 2037) and the modest increase in the projected size of the 75-year shortfall (from 1.70 percent of payroll to 2.00 percent of payroll). The longer-term financial health of the program will be dependent on a series of factors about which we can only guess at this point.

First, we do not know whether the economy will sustain the accelerated rate of productivity growth from 1995-2005 period. The average annual rate of economy-wide productivity growth averaged 2.3 percent over this decade, far above the 1.7 percent growth rate assumed in the 2009 trustees report. If the economy can sustain this rate of productivity growth in the years following the recovery, then more than 30 percent of the projected shortfall would be eliminated.

The second key factor about which we have little knowledge at this point is the wage distribution. The upward redistribution of wage income in the years following the 1983 reforms substantially worsened the projected shortfall. In 1983, 90 percent of wage income fell under the Social Security cap. However, this had fallen to just 83 percent by the beginning of this decade.

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A third key factor will be the trend in health care costs. The trustees assume that there will be a growth in the gap between hourly compensation and wages of 0.2 percentage points a year. This is due to the projection that health care cost growth will continue to outstrip the rate of economic growth by a large margin. However, if health care reform succeeds in constraining costs to grow at the same rate as the economy (except for aging), then the gap between the rate of compensation growth and the rate of wage growth can be largely eliminated. This would reduce the size of the projected shortfall by approximately 10 percent.

In short, as a result of the economic collapse there is even more uncertainty than usual around the long-term projections. This is a good reason to put off for the moment any plans to substantially alter the program. Of course, it would be incredibly mean-spirited to propose cuts to those who are either retired or nearing retirement, since they have been the primary victims of the economic collapse.

Retirees and near retirees have lost more than $10 trillion in housing and stock wealth in the last two years. It would be incredibly malicious policy to amplify the impact of these losses by cutting Social Security benefits, especially since people in these age cohorts already paid for these benefits through their Social Security taxes.


The Center for Economic and Policy Research is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people's lives. CEPR's Advisory Board includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Janet Gornick, Professor at the CUNY Graduate School and Director of the Luxembourg Income Study; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.

Dean Baker is the Co-director of the Center for Economic and Policy Research. CEPR's Jobs Byte is published each month upon release of the Bureau of Labor Statistics' employment report.

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© 2009 truthout

 

Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)
 

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Since we got substantial raises for 2009, some peo... by Margaret Bassett on Wednesday, May 13, 2009 at 3:47:50 PM
"Social Security:  Downturn Does NOT Aff... by Sister Begonia on Thursday, May 14, 2009 at 8:18:56 AM

 

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