The federal budget deficit is set to quadruple in 2009 to $1.75 trillion and President Barack Obama’s budget will add another $4.9 trillion in public debt from the beginning of 2010 through 2016. But our fiscal future is in even worse shape than that. As PBS’s Nightly Business Report noted last night, the recession is rapidly making our entitlement crisis worse:
Darren Gersh finds that due to slower projected payroll tax receipts combined with higher payments for early retirements and cost of living adjustments, “the era of large Social Security surpluses is over.” According to the Congressional Budget Office, the Social Security surplus will only be $16 billion this year, and only $3 billion next year. In total the recession will shave $150 billion off of the surplus over next three years.

Last year the trustees estimated that Social Security would have a negative cash flow by 2017. But analysts expect that number to move up significantly in this year’s trustees’ report. Gersh then talked to National Committee to Preserve Social Security and Medicare President Barbara Kennelly who claimed there is $2.5 trillion in the Social Security trust fund, and that there is therefore nothing to worry about. Problem is, as Heritage scholars David John and Brian Riedl explain that $2.5 trillion is pure fantasy:

Although it has existed since the 1930s, [the trust fund] got a new purpose back in 1983, when the Greenspan Commission came up with an idea to pay for baby boomers’ future retirements by raising the Social Security tax well above the amount currently needed to fund the program, and putting the extra money in the trust fund. Between 2018, when the program begins running a deficit, and 2042, the trust fund is expected to provide $5.7 trillion, about $100,000 per family, to pay benefits.

One problem: the federal government wasn’t allowed to actually save this money. Since 1939, federal law has required Social Security to “invest” its extra money in Treasury bonds. In other words, the government lends the money to itself. Those funds are then mixed in with all other tax revenue and spent on programs such as education, foreign aid and defense.

So in 2018, when the Social Security program tries to redeem these bonds, the Treasury (having already spent that money over the previous 35 years) won’t be able to repay Social Security from any pre-existing store of cash. Taxpayers will be forced to pay extra taxes in order to fund Social Security’s 40 million retiring baby boomers.

It’s like a family that borrows money from its retirement fund each year to pay for vacations and expensive dinners. When they finally retire, their retirement fund consists of nothing more than paper IOUs.

The recession has materially hastened Social Security’s day of reckoning. Congress can’t duck it muchlonger. It needs to be fixed. Now.