Crash course: Social Security is crashing faster than you think

POLITICIANS of both parties are finally fretting about the danger from soaring entitlement spending. Yet Congress and the Clinton Administration show no willingness to face, let alone act to avert, the coming ruin of the biggest entitlement of all. Without radical reform, Social Security threatens to cause a general fiscal crisis.

Such a warning may seem odd, given the fact that the program has run surpluses every year since the 1983 Social Security tax increases, accumulating large "trust funds" that can be tapped to pay future retirement benefits. As mandated by law, these surpluses are invested in interest-bearing U.S. government debt. As of fiscal 1993, the Old Age and Sickness Insurance (OASI) trust fund had assets of $355.6 billion, and the Disability Insurance (DI) trust fund had $10.3 billion. Hospitalization Insurance (HI), or Medicare A, had a trust-fund balance of $126.1 billion. It would seem that candidate Bill Clinton was right in 1992 when he said of Social Security, "It's solid. It's secure. It's sound."

Yet it's none of these. Social Security can meet today's obligations, but the program is doomed thanks to demographics. When the huge Baby Boom generation was born, fertility rates (number of births per woman) were unusually high. They have fallen steadily since. Thus, when the Baby Boomers begin retiring in about 2010, the beneficiary population will start growing faster than the number of workers paying Social Security taxes. Under conditions that Social Security's Board of Trustees deems most probable, the beneficiary population will increase from 42.7 million in 1994 to 80.3 million in 2030 (up 88.1 per cent), while the worker population will go from 137.2 million to 162.8 million (18.7 per cent). Under more-pessimistic assumptions, beneficiaries will double, from 42.7 million to 85.2 million, while taxpaying workers will rise from 136.9 million to 151.2 million (10.4 per cent).

Put another way, 3.2 workers now support each beneficiary (down from 5.1 in 1960 and 4 in 1965). By 2030, the ratio will be only 2 to 1. Medicare is in the same pickle. The Hospital Insurance worker-beneficiary ratio, now 4 to 1, will be only 2 to 1 by 2050. Social Security and Medicare costs will therefore begin exceeding revenues, and the trust funds will have to be drained to make up the difference. When the trust funds are exhausted, Social Security will be bankrupt.

Moreover, this crisis is approaching faster than most people realize. The annual report of Social Security's Board of Trustees presents an actuarial analysis of the trust funds' performance during the next 75 years under "optimistic," "intermediate" ("most likely"), and "pessimistic" economic and demographic assumptions. The report includes the projected dates by which the trust funds will be exhausted based on those assumptions. Examination of the projected exhaustion dates from the 1990--1994 reports is grimly revealing (see Table 1).

TABLE I: SOCIAL SECURITY'S WORSENING PROSPECTS

Year of   Projected Year of Trust Fund Exhaustion
Report       OASI      DI    OASDI     HI       Assumptions
 1990         (*)      (*)     (*)    2018        Optimistic
             2046     2020    2043    2003      Intermediate
             2027     1998    2023    1999       Pessimistic
 1991         (*)      (*)     (*)    2018        Optimistic
             2045     2015    2041    2005      Intermediate
             2026     1995    2019    2001       Pessimistic
 1992         (*)     2060     (*)    2009        Optimistic
             2042     1997    2036    2002      Intermediate
             2026     1995    2019    2001       Pessimistic
 1993         (*)     1995     (*)    2000        Optimistic
             2044     1995    2036    1999      Intermediate
             2025     1995    2017    1998       Pessimistic
 1994         (*)     1995     (*)    2004        Optimistic
             2036     1995    2029    2001      Intermediate
             2023     1995    2014    2000       Pessimistic

(*)Trust fund not projected to be exhausted within report's 75-years projection period.

Source: Social Security Administration, Office of the Actuary

As we go forward in time, the projected trust-fund exhaustion dates are creeping back toward us. In 1990, exhaustion of the OASDI (combined OASI and DI) fund under pessimistic assumptions was 33 years away (2023); under intermediate assumptions, it was 53 years off (2043). But OASDI is now projected under pessimistic assumptions to go broke in only twenty years (2014), and under intermediate assumptions in just 35 years (2029)--a grave deterioration in Social Security's outlook in just four years.

This substantial "creepback" in trust-fund exhaustion dates indicates that Social Security's future is worsening rapidly and that we are running out of time to cope with it. If the creepback continues, the Social Security crisis might hit some time in the next decade. As for Medicare, under all sets of assumptions (no matter how they slice it, in other words), the trustees conclude that "the trust fund is projected to become exhausted even before the major demographic shift begins to occur."