How big is Social Security's funding shortfall?

AP News
Posted: Aug 12, 2012 12:21 PM
How big is Social Security's funding shortfall?

WASHINGTON (AP) — Social Security's long-term funding shortfall is big by any measure. How big? That depends on how you look at it.

Over the next 75 years, after Social Security drains its trust funds, the massive program is scheduled to pay out $134 trillion more in benefits than it will collect in tax revenue, according to agency data.

That's an immense number that could use further explanation. Three ways to look at $134 trillion spread out over 75 years:

— $30.5 trillion in 2012 dollars. We all know that $134 trillion won't buy nearly as much in 2086 as it would today. Social Security's number crunchers project that annual inflation will average 2.8 percent in the long term, after a short period of slightly lower inflation. When the annual shortfalls are discounted for inflation to 2012 dollars, they come to $30.5 trillion.

— $8.6 trillion in present value. This is a financial term that Social Security uses to reflect the time value of money. It means that if Social Security had an additional $8.6 trillion on hand today and invested it in a security that paid returns of 2.9 percent above inflation for 75 years, the program would have enough money to cover the shortfall.

The problem, of course, is that Social Security doesn't have an additional $8.6 trillion on hand to invest.

— 2.67 percent of taxable payroll. Social Security uses this this term often. Think of it this way: If payroll taxes were increased by 2.67 percentage points, to a little more than 15 percent, they would generate enough money to cover the 75-year shortfall, with some left over to pay for an extra year of benefits.

Why the extra year? Who wants to start off the next 75 years with a deficit?


Sources: Social Security Administration; AP calculations.