Giant $32.1 Trillion Hole in Social Security is Almost Beyond Measure! Or Is It?


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Every summer, the Social Security Trustees release the annual Trustees Report [PDF]. Resident media scholar on Social Security (SSA) and current presidential candidate Laurence Kotlikoff had this to say to The Wall Street Journal (WSJ):

“Social Security is $32 trillion in the red, in terms of unfunded net future liabilities, which is $6 trillion more than reported last year… ”

Social Security is not in the red currently, and holds a net asset of $2.9 trillion, which is enough to cover expected shortfalls through 2034. After that date, SSA will continue to receive enough money to pay about three-quarters of benefits through 2090 assuming no program changes. These predictions are about the same as last year, very slightly improved. The $6 trillion more applies to the period after 2090, called the “infinite horizon.”

THE INFINITE HORIZON

The Trustees Report explains the total projected shortfall of $32.1 trillion: “The $20.7 trillion increment reflects a significant financing gap projected for OASDI for years after 2090 into perpetuity.” In other words, funding is short by $11.4 trillion for the next 75 years, through 2090, and short $20.7 trillion more forever.

This shortfall to infinity assumes a GDP (Gross Domestic Product) of $2361.4 trillion ($2.4 quadrillion), and a gross wage base subject to Social Security of $801.4 trillion. The difference of $1560 trillion will go to people who make money but are exempt from paying the Social Security tax. Let’s graph these numbers.giant-32-trillion-hole-social-security-bars
On the “infinite horizon,” we will have spent $31.1 trillion on fast food and beer. Infinity is pretty large, but in fast food and beer terms, it is still short of filling the Social Security hole, especially when considering that the SSA hole is present value and the fast food and beer spending is future spending.

THE $6 TRILLION CHANGE STARTS IN 2090

The Trustees Report explained the $6 trillion increase over last year’s projection. “The major change affecting the infinite horizon unfunded obligation for this report is the reduction in the ultimate real interest rate from 2.9 percent to 2.7 percent, which provides more weight to annual shortfalls in the more distant future.” A small interest assumption change 75 years out and beyond has a big effect.

Laurence Kotlikoff does not think this money can be found. “Make no mistake, while the Federal Reserve has printed a few trillion already, it cannot print $199 trillion to bail out the economy. That would produce the mother of all hyperinflations.”

THE NEXT 75 YEARS

As mentioned above, $11.4 trillion will fill the entire SSA hole for 75 years. From 2008 through 2014, the Federal Reserve Bank “purchased almost $4.5 trillion in Treasury and mortgage bonds.” This policy would eat up $11.5 trillion in just 16 years. Even with this spending, inflation was kept fairly low by historical standards. Inflation worries only apply to disfavored spending like retirement — not to bank and asset bailouts.

Somehow, Laurence Kotlikoff tied the $11.4 trillion over 75 years and the additional $20.7 trillion to infinity with this $199 trillion of who-knows-what. That number sounds really large! We added it to the graph above earlier.

FILL THAT HOLE

There are many ways and combinations to fill the hole. The entire shortfall is “1.4 percent of GDP.”

On the bar graph above, the $801.4 trillion number, or 33.9 percent of GDP is subject to SSA tax. The $1560 trillion number, or 66.1 percent of GDP  is exempt for SSA tax.  If we could bring that split to 50-50, we would have an SSA surplus forever.

We could also place an SSA tax upon unearned income.  In the 2009 Patient Protection and Affordable Care Act, a medicare surcharge of 3.8 percent was added to those who received unearned income over $250,000. The next year, the Trustees Report showed a 12-year improvement in the Medicare fund. Something like this would work just fine for Social Security — or there are dozens of other ways to take care of our seniors.

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