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Last week, the Social Security trustees released their annual report on the long-term health of the Social Security and Medicare systems. On the surface, it appears that the financial position of the Social Security system improved slightly compared to last year’s report. The Trustees say that the system will begin to run cash shortfalls in 2015, compared to last year’s estimate of 2014, and that the "trust fund" will run out of IOUs in 2037, as opposed to 2034 in last year’s report.
Ironically, the very thing that is responsible for the system’s short-term improvement is actually causing its growing long-term liability.
But lawmakers should not interpret this modest good news as an excuse to delay taking steps to reform the system. A closer look at the Trustee’s report shows that the system’s long-term health has deteriorated. Last year, for example, the system faced cumulative cash shortfalls of $122 trillion, $19 trillion after adjusting for inflation. By contrast, the system now faces $134 trillion in cumulative cash shortfalls, $21.6 trillion in today’s dollars.
Some lawmakers may find solace in the fact that, thanks to the booming economy, the system’s large surpluses have added enough IOUs to the trust fund to keep the system technically "solvent" until 2037. The practical effect of this, however, is that once the system begins "cashing-in" its bonds in 2015, the government will have to raise $11.3 trillion (roughly $4.3 trillion in today’s dollars) through new taxes or borrowing, to meet the system’s shortfalls through 2037.
Ironically, the very thing that is responsible for the system’s short-term improvement is actually causing its growing long-term liability. The rising incomes of today’s workers are not only generating the system’s large surpluses, but also its larger liability. That’s because Social Security benefits are tied to a worker’s income over a career, not the amount of money they put into the system. So, as the incomes of today’s workers rise, so too does the system’s long-term liability to pay their larger benefits.