Friday, June 21, 2013

Economics Prof: Social Security is 32 percent underfunded

...[T]he just-released 2013 Trustees Report on Social Security’s long-run finances. Table IVB6 shows an infinite horizon fiscal gap of $23.1 trillion separating the system’s projected costs and taxes net of its trust fund. This massive shortfall, which grew a whopping 8 percent last year, is 50 percent larger than U.S. GDP and almost twice the federal debt held by the public.  
Table IVB6 also reports Social Security’s 75-year fiscal gap. It’s only $9.6 trillion or 41 percent of $23.1 trillion. Thus, the 75-year fiscal gap hides three fifths of the system’s true long-term shortfall. 
Eliminating the infinite horizon fiscal gap requires an immediate and permanent 4 cents on the dollar hike in Social Security’s current 12.4 percent FICA tax rate. That’s a 32 percent increase, implying that Social Security is 32 percent underfunded! Alternatively, we could cut all Social Security benefits immediately and permanently by 22 percent. ... 
For the U.S. government as a whole, the infinite horizon fiscal gap is a whopping $222 trillion! It’s elimination requires not a 32 percent immediate and permanent tax hike in Social Security FICA taxes or a 22 percent immediate and permanent cut in Social Security benefits, but either a 64 percent immediate and permanent tax hike in all federal taxes or a 40 percent immediate and permanent cut in all expenditures apart from servicing official debt. So, Social Security’s enormous fiscal problem is just a molehill in front of a mountain of horrendous obligations our politicians and their “trustees” are ignoring with their careful choice of words and their finite budgeting horizons.
Source: Laurence Kotlikoff is an economist at Boston University and co-author of "The Clash of Generations." Hat tip John Goodman.