When will Social Security shortfalls begin to pinch: although the political debate focuses on 2040 and 2017, the critical date is 2009.

The impact of Social Security's eventual insolvency will be felt as soon as the balance between income and cost of Social Security will begin to shrink, which is currently projected to occur in 2009. This is because a shrinking Social Security surplus reduces government's ability to rely on that surplus to help fund the rest of its operations as it does now. The shortfall will need to be made up by increased taxation or borrowing, by reduction of Social Security benefit payments or of non-Social Security government programs, or a combination of these alternatives.

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A key issue in the topic of Social Security reform is whether and when the Social Security trust fund will eventually become insolvent. Arguably, considering its politically sensitive nature, Social Security reform might not even be on the political agenda if not for that eventual insolvency. (1)

The debate over the significance of the Social Security trust fund is as old as Social Security itself. (2) In recent years, the disagreement about a future Social Security insolvency has tended to focus on two years, which are currently 2040 and 2017. Those who oppose reform of the current system by and large claim that insolvency, if it will occur at all, will not do so until 2040. This is too far in the future, they say, to warrant taking drastic measures now that would alter a system that today is not anywhere near insolvency. Since it won't be broke for some time, don't fix it. (3) Those who favor reform of the current system, on the other hand, claim that the day of reckoning is much closer at hand, namely in the year 2017, and that action to address Social Security's projected insolvency is therefore required more urgently than those who oppose reform make it out to be. (4)

Both sides make their choice of year based on information derived from Social Security's annual report prepared by its Board of Trustees. (5) In reality, however, data in this same report indicate that both sides are underestimating the problem because the impact of the anticipated deteriorating financial condition of the Social Security trust fund will start to be felt much sooner than either 2040 or 2017, namely in the year 2009, or in less than three years. (6)

Examining the Different Dates

To examine the significance of these different years, consider the data in Table 1, which contains future cash flow projections of the Social Security trust fund derived from its most recent annual report released in May 2006.

The figures in column A are the projected annual income amounts of the Social Security …