Social Security Scare: Is Government Running Out of Funds?

March 3, 2011— -- Lawmakers on both sides of the political aisle are hesitant to put Social Security on the chopping block, but with the U.S. debt growing rapidly, time to reform the 76-year-old program is running out, experts say.

The debate over a program that has become a sacred cow for senior citizens comes at a time when Democrats and Republicans are wrangling about how to fund the government for the rest of the year and beyond.

Democrats charge that the Republicans' continuing resolution would cut essential funds from the Social Security Administration and in turn hurt thousands of retirees who may not get their benefits or be able to enroll on time. The cuts, Republicans say, would amount to $125 million from current levels and $500 million from the reserve fund.

The SSA has warned of possible worker furloughs if the Republicans' plan is approved.

It's "gamesmanship that's being played. The consequences are real," said Rep. Xavier Becerra, D-Calif. "Social Security didn't do one single thing to create this mess."

Republicans say the cuts are needed to balance the budget. They instead blame President Obama for not seizing the opportunity to lead the charge on reforming Social Security, which the nonpartisan Congressional Budget Office estimates will post a deficit of $600 billion over the next ten years.

Social Security comprises 20 percent of the White House's 2012 budget proposal. Even though the report acknowledges that the program faces a "long-term financing shortfall," it doesn't suggest any reforms. Instead, the budget provides an additional $1 billion from 2010 -- for a total of $12.5 million -- to reduce the backlog of disability claims.

More than 54 million Americans -- about one in four U.S. households -- receive benefits each month through Social Security. About 70 percent of those checks, which average $1,076, go to retired workers and their families, and the rest to disabled Americans and recipients' survivors.

The number of enrollees is expected to grow as the baby boomer generation begins retiring, while the pool of workers who contribute to Social Security will grow relatively smaller.

Social Security isn't funded through the federal government. Checks instead are disbursed from a separate trust fund that is replenished by the payroll tax that workers and employers pay. Currently, U.S. workers pay a 6.2 percent payroll tax.

Proponents of the program argue that Social Security does not by itself add to the federal budget deficit, and, in fact, works much like a private entity. But others say the idea that Social Security isn't linked to the deficit is a myth.

This year alone, the program is projected to collect $45 billion less in payroll taxes than it pays out in benefits, according to the CBO. The program posted its first deficit last year for the first time since the 1980s, and that means it will have to borrow money, which would add to the deficit.

Social Security Under the Limelight Amid Budget Debate

The Congressional Budget Office has estimated that the Social Security reserve will run out of funds by 2037.

"Ultimately you just need more money coming in or less money going out," said Andrew G. Biggs, former principal deputy commissioner of the Social Security Administration and currently a resident scholar at the conservative American Enterprise Institute.

After 2037, "you would have to cut benefits by around 22 percent across the board for new and old retirees alike, so it would be a really drastic cut," he said. "If you know you have to make changes, you start today. You spread the pain over as many generations of people as you can."

In 1950, there were 16 workers per beneficiary; in 1960, there were five workers per beneficiary; in 2010, the ratio was three workers to one beneficiary, and by 2025, there will be just 2.3 workers "paying in" per beneficiary, according to estimates compiled by the president's non-partisan fiscal commission.

"Unless we act, these immense demographic changes will bring the Social Security program to its knees," the report stated. "Without action, the benefits currently pledged under Social Security are a promise we cannot keep."

If the Social Security reserve does run out of funds, millions of new enrollees would have to be rejected, those enrolled in the program are likely to see benefit cuts, and working Americans could see a sudden increase in their payroll tax.

Twenty-six years may seem a long way off, but experts say the program could become unsustainable if the government doesn't take action today.

"Our window for a reasonably tolerable solution is closing pretty fast," said Charles Blahous, former deputy director of President George W. Bush's National Economic Council and currently a research fellow at the Hoover Institution at Stanford University.

"The cost of delay right now is incredibly costly because baby boomers are already retiring," he said. "Each year you wait, you have millions more people whose benefits are politically inviolate and your options start to get constrained very very rapidly. The idea we can wait till 2037 is nuts."

Proponents of reform say, however, that the Republicans' proposal to trim money from Social Security's budget isn't the answer either.

"I think we should target the cuts in areas we think that are not as important so government can do what it needs to do," Biggs said.