The $20.5 Trillion Timebomb: Fiscal Gap Separating SS’s Liabilities and Assets
by LAURENCE KOTLIKOFF July 17, 2012
Social Security's trustees say the system needs only "modest changes." In fact, the system is desperately broke.
The proof is buried deep in the trustees' own 2012 report in a complex table, numbered IV.B6. Table IV.B6 is a long-run balance sheet for Social Security. It shows that the system's $88.9 trillion in liabilities exceed its $68.4 trillion in assets by $20.5 trillion.
The $20.5 trillion fiscal gap separating Social Security's liabilities and assets - its unfunded liability - is enormous; it is 1.4 times US gross domestic product and 34 times annual Social Security taxes.
Because $20.5 trillion is equal to 31% of the projected taxes, the system is 31 percent underfunded. To pay all promised benefits would require immediately and permanently raising Social Security's 12.4 percent payroll tax (split evenly between employer and employee) by 31%, or 3.9 percentage points.
American workers would be ill-disposed, particularly in an election year, to say goodbye to the current temporary two- percentage-point payroll-tax cut, let alone surrender 3.9 cents more per dollar earned in exchange for no extra benefits.
What about cutting benefits? The $20.5 trillion is 23% of the present value of projected benefits. Hence, "saving" Social Security this way requires reducing all benefits immediately and permanently by almost one quarter - a non-starter for most of the system's 55 million beneficiaries.
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