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Social Security sounder than you might think

Economic Scene: The latest report from the trustees of the system show improvement in its finances, despite some grim coverage.

By David R. Franciscolumnist / April 7, 2008

The 1 in 4 American families who receive some form of Social Security benefits should be cheered by the latest annual report of the system's trustees.

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That report, issued March 25, shows "a really significant improvement" in the finances of the system, says Andrew Biggs, who helped draft the report while serving as deputy commissioner of the Social Security Administration (SSA).

That's not the way some in the press saw this report. One headline used the word "grim." That description would be true in regard to the report of the Medicare trust fund that pays hospital benefits. While the four trustees signing the report foresaw "enormous challenges" for both programs, they expected Medicare's financial difficulties to come sooner and be "much more severe" than any problems tied to Social Security.

What perhaps caused some confusion among the public is that the report calculated that benefits paid would exceed revenues from taxes on payrolls in 2017, same as last year's report. That prospect is based on the fact that the nation's 80 million baby boomers have now begun to retire.

But the reserves of special Treasury bonds in the system's trust fund will not be exhausted until 2041, as was also stated last year. Yet any fix for the Social Security system should be financially easier, the report indicates.

The system's actuaries now project that an increase in immigrants and their children mean that the number of tax-paying workers in relation to retirees will be higher after 2041 than previously estimated. More immigrants paying taxes means that the actuarial deficit over the next 75 years has dropped from $4.7 trillion in last year's report to $4.3 trillion in the 2008 report.

Those numbers may seem huge, but they are "manageable," says Paul Van de Water, an economist with the National Academy of Social Insurance (NASI) in Washington. "Social Security is structurally sound and does not require drastic changes."

It would take a permanent boost in the payroll tax from 12.4 percent of wages to 14.1 percent (half paid by the employee, half by the employer) to keep the program fully solvent for the next 75 years. Or benefits could be cut a little.

But the important message here is that the system is not bankrupt. Tax revenues will still be rolling in after 2041. If Congress fails to pass remedial legislation and the long-term forecasts of the SSA are correct, the system will still have enough revenue to pay 78 percent of the benefits promised in 2041.