Social Security System to Pay More than Its Revenue

The social security system has reached an important threshold that it was not likely to cross until 2016. The system would pay more than it would earn this year because of the poor economy.


Social security issues

The social security system has suffered in the last 2 years – like every other part of the economy – and the effect will be reflected in its latest accounts, according to the Congressional Budget Office (CBO). The revenues have fallen because the major source for revenue is tax on payrolls. With people losing their jobs, payrolls have dropped significantly, and so have the revenues. On the other hand, expenses have increased. The people who have lost their jobs are now claiming benefits through social security and this has put a huge strain on the system.

The situation that the social security system is facing now was predicted to come in 2016 and no one doubted that it would be inevitable that one day expenses would exceed revenues. The 2016 estimate was calculated when the recession kicked in during 2008. It was expected that unemployment would reach 8.2% in 2008 and then about 8.9% in 2009. But the economic situation has turned out to be much worse than expected, with the unemployment hovering near the 10% mark.

Demographic issues

Due to an aging population, this change is going to be irreversible one day as the number of people claiming benefits would always be higher than the number of people paying taxes on payroll. But because of the economic turmoil, that day has been come sooner than expected.

The system had faced a similar situation in 1980s, when the previous Fed chairman, Alan Greenspan, had helped in crafting measures to make the system more robust and avert the crisis. The crisis was devastating for the economy and hurt many luxury markets that were previously strong, for example private yacht charter. Greenspan said that the situation is very similar this time, and there are simply three options available – increase taxes, reduce benefits, or print money. The last option would be inflationary, and it is unlikely that it would be adopted.

Looking at the positives

Although the system has hit a critical point, it is by no means close to insolvency. The system still has about $2.5 trillion in reserves, which means that it would be a long time before it faces a payment crisis. It is widely expected that the government would take some action before that point is reached, in order to make the system more stable by providing it other sources of funds.