Social Security 2011 – Another Bad Year
Note: After writing this article I received a number of comments that questioned whether the numbers presented in this piece reflect the 2% payroll tax holiday that occurred in 2011. The answer is that these numbers do take that into consideration. Yes, there was a tax break this year. But there was no consequence to SS as a result of the tax break. Every month Treasury has transferred money to SS to make up the shortfall. The American people are $110B poorer, but SS is not.
The following is a slide from SSA that shows income components on a monthly basis for 24 months (ending 10/11). Look on the bottom right and you will see a new revenue source as of 1/1/2011 marked Other Income. This is the monthly transfer from Treasury to make up for the drop in actual tax receipts.
Sorry If that was not clear.
The original article:
Full calendar year 2011 numbers are now available to calculate the results for the Social Security Trust Fund. Here's a look at the key numbers that will be reported to Congress in four months:
Payroll Tax Revenue: $669B ($642B - 2010)
Benefit payments: $726B ($702B - 2010)
Primary Deficit: $57B ($60B - 2010)
Other cash components at SSA:
Tax on benefits: $23B (2010 - $24b)
Payments to R.R. Retirement: $4.6B ($4.4B - 2010)
Overhead: $7.0B ($6.5B - 2010)
Net 2011 cash drain: $46B ($49B - 2010)
Non cash items
Interest: $116B ($117.5B - 2010)
Paper surplus: $70.0B ($68.5B - 2010)
The reported numbers will show a very small improvement ($3B ) in the net cash drain. This may cause some to look at the 2011 results and say, “See! Things are stabilizing and even getting better!” Let me try to blunt any enthusiasm in advance.
SSA measures (A) actual monthly cash receipts and then (B) makes assumptions about what additional amounts are coming in based on a series of macro assumptions (GDP, employment/unemployment, etc.). The Treasury Department pays SSA the sum of A+B. Ultimately all of the money is accounted for and any adjustments (plus or minus) are reflected in the next year's results.
This system works pretty well as the annual adjustments have been fairly modest and the adjustments have been both positive and negative. That was not the case in 2009. The models that SSA uses significantly overestimated tax revenues in that year. As a result, there were very significant downward revisions to the actual receipts that were reported in 2009. Following is a slide of SSA’s monthly 2010 revenues. Note that the revisions to FICA and SECA from the prior years totaled $28B. (2009 and 2011 also have significant prior year adjustments.)
To regularize the data for the big accounting changes it is necessary to add/subtract the adjustment from the prior year and then look forward to what overstatements/understatements were made in the then current year. When the ins and outs are made, the results for the regularized FICA/SECA revenue numbers are as follows:
The following chart shows adjusted Payroll Tax revenues minus Benefit Payments:
Looking at the data on this basis, you'll see the actual deterioration that took place in 2011. 2012 will be worse than 2011. Benefits are going to jump by $50B+ next year. 10,000 new people are signing up for checks every day of the week. Add the fact that every one of the 55mm beneficiaries will be getting 3.6% more in their checks (COLA adjustment). The revenue side is a wild card. What will GDP be? If it's around the 2% that is currently anticipated, revenues at SSA will fall well below plan. A flat economy (+2%) would translate into a $100B 2012 primary deficit (payroll receipts minus benefits). A number like that is not on anyone’s radar today.
The following is a chart used by the House Finance Committee. It plots the expectations for net cash drains at SSA. While there is plenty of red ink in the chart, there is not nearly enough to describe what is going to happen. Note that the expectation is for some improvement in 2011 and relative stability until 2018 when the red ink explodes. On the chart, I think today we are really at the 2017 level. 2012 will bring us the results depicted in the chart for 2018.
The 2011 numbers for SSA indicate that we are at least five years ahead of existing thinking on the SSA deficits. When this realization sinks in, it will break the hearts of the SS defenders. If we are, as I contend, five to six years ahead of “schedule” with cash deficits at SSA, there is no alternative besides cutting scheduled benefits. Raising taxes to fill a hole this big is not an option. Nor is it an option to maintain the status quo and allow for a very rapid rundown of the SS Trust Fund.
If we are going to experience what I believe we will, then the cumulative SS cash shortfall over the next decade will add ANOTHER $1.5 trillion onto Public Sector Borrowing ("PSB"). (A shift from the Intergovernmental account into the PSB account; AKA the Chinese). This increase in PSB more than offsets the $1.2 T of cuts that the congressional super committee failure has just mandated.
The consequences of SS (and similarly the other government retirement funds) on PSB over the coming years is not now being considered by those looking at America’s debt profile. It will be soon enough. The current thinking is that SS is a problem that can be worried about in another ten years or so. That's simply not true.