Social Security’s Looming Problem

It’s interesting how policies have unintended effects. Last year commodity prices shot up. Some people think this largely was due to central banks’ pumping up their money supplies. Others think the main culprit was the disruption from the Arab Spring turmoil. Whatever the reason, there was a temporary surge in commodity prices that translated into a temporary surge in consumer prices. But that temporary surge remained in place long enough to cause a boost in Social Security benefits under the cost of living adjustment formula. Under the law, SS benefits can’t decline. So the higher benefits are the new baseline, and they are much higher than SS’s actuaries were forecasting a year ago.

The bottom line, according to Allan Sloan in Fortune, is that the program’s finances have taken a big hit. When the next trustees’ report comes out in the Spring, it will reveal the extent of the damage and how quickly it hastens the day when Social Security’s tax receipts aren’t enough to pay the year’s benefits.

Last spring, Social Security had projected that beneficiaries would get an increase of 0.7 of one percent. However, because of higher energy prices and other inflationary fallout touched off largely by Arab Spring, the adjustment was 3.6%. That increased what Social Security pays out, and didn’t add significantly—or perhaps not at all—to what it takes in. And before we proceed: I’m not judging Arab Spring and its aftermath. I’m just telling you the impact that it had on the Social Security system.

Anyone who truly understands Social Security knows that its real and growing problem is that the cash it’s taking in from taxes is falling behind what it pays to beneficiaries. Official Washington is obsessed with the size of the system’s trust fund—but that can be easily gamed by putting government IOUs of various sorts into the fund. Numerate Washington worries that an increasing cash flow deficit forces the government to borrow from investors to help cover Social Security’s outgo.