The wheels totally fell off during the next two quarters. Annualized GDP fell by 5.4% and 6.4%, respectively, in the final quarter of 2008 and the first quarter of 2009. The POR economy became the POR recession as normal people define it. Through the second quarter of this year, the economy has contracted by 3.8% since the POR economy began.
The effect on employment, and therefore the number of people paying Social Security taxes, has been dramatic. Monthly seasonally adjusted job losses, which averaged 137,000 from January to August 2008, have averaged an utterly intolerable 486,000 during the past 12 months:
Meanwhile, the seasonally adjusted unemployment rate has risen to 9.7%.
Social Security’s trustees recognized the negative impact of the POR economy through the end of 2008, which is why the cash breakeven point came back to 2016. But since then, that seven-year cushion has vanished.
The Congressional Budget Office (CBO) predicts that the system will report what it calls a “primary surplus” (tax collections less benefits and administrative costs) of $18 billion during the government’s September 30, 2009, fiscal year, followed by small cash deficits in fiscal 2010 and 2011. Okay, but more recently, as shown here, July had a cash deficit of a relatively small $523 million; August’s deficit of $5.76 billion was far more serious.
September is on track to be even worse than August. Through Friday, September 25, overall Treasury receipts from economic activity were 28.5% lower than they were as of September’s final Friday a year ago:
Social Security taxes represent a significant element of the first and third line items above. September 2009’s Social Security collections will surely trail September 2008 by billions of dollars.
President Obama’s chief economic adviser Larry Summers believes that “the level of unemployment … will, by all forecasts, remain unacceptably high for a number of years.” Collections will lag for quite a while.
Meanwhile, Social Security payouts have skyrocketed and are locked into higher near-term levels than were anticipated, thanks to a 23% spike in applications for retirement benefits, many by those in their early 60s who lost their jobs. It seems highly doubtful that the tiny surpluses CBO hopes for during the next two years will materialize. After that, the wave of retiring baby boomers will probably send annual cash deficits into triple digits in short order.
Finally, if you’re banking on the $2.4 trillion Social Security “Trust Fund” for relief, forget about it. Contrary to established wisdom, it is not a stash of cash or investment securities set aside to pay future benefits. Rather, as demonstrated previously, it consists almost entirely of IOUs from the rest of the government, which happens to be about $12 trillion in debt. Barring major structural reform, Social Security’s ever-worsening cash shortfalls will of necessity have to be covered by either borrowing more, raising taxes, or cutting benefits.
Aren’t you glad Pelosi, Obama, and Reid thwarted and then applauded the demise of Social Security reform efforts four years ago?