August 2, 2014

Social Security’s Cash Deficits

  • Social Security, established in 1935, is the federal government’s largest program. It represents approximately one-fifth of the federal budget and...

The Congressional Budget Office created a stir when it reported last week that Social Security paid out $37 billion more than it took in last year. The CBO projected that Social Security would run perpetual cash deficits from this point on, rising from $45 billion this year to $118 billion in 2021.

The cash deficits will force Social Security to draw on its trust fund balance. But the trust funds simply represent a promise from one arm of government (the Treasury) to pay another arm of government (Social Security); the government still has to come up with the money from somewhere.

This means raising more tax revenue, squeezing other parts of the federal budget, borrowing more money or relying on some combination of those options. And Social Security’s future funding needs are small in comparison to those of Medicare and Medicaid.

Social Security’s cash deficits – coming before the vast majority of baby boomers have even qualified for benefits -- highlight the need to begin phasing in entitlement reforms soon to prevent an explosion of debt.