WASHINGTON (AP) — Social Security's long-term funding shortfall is big by any measure. How big? That depends on how you look at it.
Over the next 75 years, after Social Security drains its trust funds, the massive program is scheduled to pay out $134 trillion more in benefits than it will collect in tax revenue, according to agency data.
That's an immense number that could use further explanation. Three ways to look at $134 trillion spread out over 75 years:
— $30.5 trillion in 2012 dollars. We all know that $134 trillion won't buy nearly as much in 2086 as it would today. Social Security's number crunchers project that annual inflation will average 2.8 percent in the long term, after a short period of slightly lower inflation. When the annual shortfalls are discounted for inflation to 2012 dollars, they come to $30.5 trillion.
— $8.6 trillion in present value. This is a financial term that Social Security uses to reflect the time value of money. It means that if Social Security had an additional $8.6 trillion on hand today and invested it in a security that paid returns of 2.9 percent above inflation for 75 years, the program would have enough money to cover the shortfall.
— 2.67 percent of taxable payroll. Social Security uses this this term often. Think of it this way: If payroll taxes were increased by 2.67 percentage points, to a little more than 15 percent, they would generate enough money to cover the 75-year shortfall, with some left over to pay for an extra year of benefits.
Why the extra year? Who wants to start off the next 75 years with a deficit?
Social Security adds to budget deficit
WASHINGTON (AP) — Now that Social Security is paying more in benefits than it collects in taxes, there is a fierce debate among politicians, academics and advocates about whether those shortfalls are adding to the federal budget deficit.
The issue is important because the federal government's annual deficit already exceeds $1 trillion, making any more borrowing tough to swallow. If Social Security is adding to the government's financial problems, it becomes even more urgent to fix it.
"Over 77 years and now through 13 recessions, Social Security has not added one penny to our deficit or our debt," Rep. Xavier Becerra, D-Calif., said at a recent hearing by the House Ways and Means Social Security subcommittee. Becerra is the top Democrat on the panel.
"I believe that Social Security has not contributed one nickel to the deficit because it is funded by the payroll tax," Sen. Bernie Sanders, a Vermont independent who heads the Senate Social Security caucus, said in an interview.
Former Sen. Judd Gregg, R-N.H., disagreed.
"We all know that it's on a cash-flow basis," Gregg said in an interview. "The cash comes in, the cash goes out, and right now we're running a negative cash flow."
The Facts: Social Security's shortfalls are adding to the federal budget deficit, in a roundabout way. One big reason: The rest of the government has been running such huge deficits over the years that it has spent all of the surpluses accumulated by Social Security.
Here's how it works: For nearly three decades Social Security produced big surpluses, collecting more in taxes than it paid in benefits. The government, however, spent that money on other programs, reducing the amount it had to borrow from the public, including foreign investors. That's why some advocates complain that Congress has "raided" Social Security.
In return, the Treasury Department issued special bonds to Social Security. The bonds are now valued at $2.7 trillion. They are accounted for in two Social Security trust funds, one for the retirement program and one for the disability program.
The bonds pay interest like other Treasury notes and are backed by the full faith and credit of the U.S. government.
Social Security is now spending a portion of the interest because it needs cash to cover monthly benefit payments. This year Social Security is projected to pay $789 billion in benefits and administrative costs and collect $623 billion in payroll taxes and taxes on benefits, a shortfall of $166 billion.
About $112 billion of the shortfall is from a temporary reduction in the payroll tax that is scheduled to expire in January. There is no question that money adds to the budget deficit because Congress financed the tax cut through borrowing.
The rest of this year's shortfall, about $54 billion, will be financed by the interest payments. Social Security's trust funds are projected to earn about $110 billion in interest this year.
Until recently, the interest payments were an accounting device, with one part of the government crediting an account held by another part of the government. As interest accumulated, Social Security's trust funds grew on paper but no money changed hands because the program had plenty of cash from payroll taxes to pay benefits.
Now that Social Security needs money from the interest payments to cover monthly benefits, the cash has to come from somewhere.
"If you don't have the cash to pay for it, then you have to borrow that money from China or you have to raise taxes," Gregg said. "Those are the only two options."
Becerra, however, said it is wrong to blame Social Security for adding to the budget deficit when it is simply spending money generated by its investments. That's like blaming bondholders for expecting to be repaid, he said.
"If we don't owe Social Security — Americans who paid into it — then we don't owe the foreigners either," Becerra said.
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