WASHINGTON - The 2009 Social Security Trustees Report
shows a considerably worse short-run picture and slightly worse
long-run picture than the 2008 report. In the short-run, the annual
surplus of taxes over benefits is projected to be just $18.8 billion in
2009 and $18.3 billion in 2010. This compares with projected surpluses
of taxes over benefits from the 2008 report of $87.1 billion for 2009
and $82.7 billion for 2010. (It is important to note that the Trust
Fund is projected to collect $238 billion in interest on government
bonds in these years, in addition to its tax revenue.)

It is not surprising that Social Security's annual financial picture
deteriorates in a downturn. This is entirely predictable and in fact
desirable. Social Security's tax revenues fall as workers lose their
jobs.

Almost two-thirds of the reduced surplus this year is due to an
unusually large cost-of-living increase for 2009.  The latest
adjustment accounts for last year's rise, but not the fall in oil
prices.  Though continuing benefits are automatically adjusted for
inflation, this year Social Security will be paying a 6.9 percent
larger real benefit to retirees, disabled workers and their families.

In this way the program provides income security to households and acts
as an important stabilizing force in the economy. Social Security would
be a much less effective program if its annual finances did not
deteriorate when the economy went into a slump.  

This short-term falloff in revenue has a relatively limited effect on
the program's finances as indicated by the limited movement in the
projected date of the Trust Fund's depletion (from 2041 to 2037) and
the modest increase in the projected size of the 75-year shortfall
(from 1.70 percent of payroll to 2.00 percent of payroll). The
longer-term financial health of the program will be dependent on a
series of factors about which we can only guess at this point.

First, we do not know whether the economy will sustain the accelerated
rate of productivity growth from 1995-2005 period. The average annual
rate of economy-wide productivity growth averaged 2.3 percent over this
decade, far above the 1.7 percent growth rate assumed in the 2009
trustees report. If the economy can sustain this rate of productivity
growth in the years following the recovery, then more than 30 percent
of the projected shortfall would be eliminated.

The second key factor about which we have little knowledge at this
point is the wage distribution. The upward redistribution of wage
income in the years following the 1983 reforms substantially worsened
the projected shortfall. In 1983, 90 percent of wage income fell under
the Social Security cap. However, this had fallen to just 83 percent by
the beginning of this decade.

It is possible that the events of the last two years will at least
partially reverse this upward redistribution of income, most obviously
by cutting salaries for the most highly paid workers in the financial
industry. If the upward redistribution of the last quarter century were
fully reversed, it would eliminate approximately one-third of the
projected shortfall.

A third key factor will be the trend in health care costs. The trustees
assume that there will be a growth in the gap between hourly
compensation and wages of 0.2 percentage points a year. This is due to
the projection that health care cost growth will continue to outstrip
the rate of economic growth by a large margin. However, if health care
reform succeeds in constraining costs to grow at the same rate as the
economy (except for aging), then the gap between the rate of
compensation growth and the rate of wage growth can be largely
eliminated. This would reduce the size of the projected shortfall by
approximately 10 percent.

In short, as a result of the economic collapse there is even more
uncertainty than usual around the long-term projections. This is a good
reason to put off for the moment any plans to substantially alter the
program. Of course, it would be incredibly mean-spirited to propose
cuts to those who are either retired or nearing retirement, since they
have been the primary victims of the economic collapse.

Retirees and near retirees have lost more than $10 trillion in housing
and stock wealth in the last two years. It would be incredibly
malicious policy to amplify the impact of these losses by cutting
Social Security benefits, especially since people in these age cohorts
already paid for these benefits through their Social Security taxes.