Milken Institute Review 2Q10 Page 57

Second Quarter 2010

a grim future?
The most recent report of the Social Security
trustees indicates that the short-term sur-
pluses flowing into the Social Security trust
funds the difference between current reve-
nue and current outlays fell during the
2008-9 recession. There is now a real chance
that the system will run a cash-flow deficit as
early as 2010, some seven years earlier than
previously projected. As a matter of law, poli-
cymakers will not be required to stanch the
cash hemorrhage for another two to three de-
cades. But as the program slips into the red,

there will be increased pressure to address
this issue from a federal budgetary perspec-
tive. And if past efforts to reduce the Social
Security funding gap are any indication,
higher payroll taxes will be part (or all) of the
fix. One now-familiar consequence: addi-
tional claims against labor compensation that
crowd out take-home pay and squeeze living
standards.

Under current law, the cost of Social Secu-

rity pension outlays is projected to climb
from 12.35 percent of covered payroll in 2009
to 16.76 percent of covered payroll by 2030.

That would represent an average annual

growth rate of 1 percent in the share of com-
pensation diverted to Social Security financ-
ing if all the money came from payroll taxes.

And the longer policymakers wait to address

the financing issues faced by Social Security,
the more baby boomers will be retired and

politically untouchable and thus the greater
the likelihood that revenue increases will be
the primary source of the program adjust-
ment.

While contributions to employer-spon-

sored pensions were limited over much of the

1980s and 1990s for reasons mentioned ear-

lier, the big bump-up in the next decade will
endure a while longer: plan sponsors must
fund their obligations to the baby boomers as
they approach retirement. Some of this fund-
ing pressure is likely to be offset by the de-
cline in defined-benefit plan coverage in re-

cent years both by closing plans to new
hires and by freezing pension accruals to cur-
rent employees. But plan sponsors will have
to dig deeper simply to make up for the gap
in funding created by the steep declines in
plan asset values.

Many companies have cut back matching

funds for employee 401(k) plans in response
to the recession. And, in theory, this will leave
room to shift more productivity gains from
benefits to wages. But that is hardly in the in-
terest of workers, who are less and less likely
to be covered by traditional defined-benefit
pensions and who have seen their own retire-
ment nest eggs fall in value with the decline in
stock prices. Add to this the reality that Wash-
ington will soon be under pressure to trim
Social Security benefits for future retirees
say, by raising the age at which retirees are el-
igible for full benefits and now hardly seems

s a matter of law, policymakers will not be required

to stanch the cash hemorrhage for another two to three

decades. But as the program slips into the red, there

will be increased pressure to address this issue from

a federal budgetary perspective.