Will Social Security be the Next Bailout Candidate?

For the first time in 25 years, Social Security will spend more on benefits than it will receive in taxes. As a result, the government program may well be the next candidate for a massive government bailout.

The nonpartisan Congressional Budget Office (CBO) released a report last week showing that for the first time in more than two decades, Social Security will be cash-negative. The CBO estimates that Social Security will see an overall surplus of $92 billion in 2010. That sounds good in theory, except that $120 billion of that total is interest income. Excluding interest income, Social Security will see an overall deficit of $28 billion in 2010.

Interest income must be excluded given that it's not actually income. The interest is "paid" in the form of Treasury IOUs; it's not cash with which the fund can pay benefits to retirees. It's merely an accounting entry in a ledger.

Looking forward, the CBO estimates that deficits will be smaller in 2011 and 2012, will then break even for a few years, before deficits again become the norm. These deficits will have to be funded with cash. Plus, they are only expected to grow as the population ages.

Advocates of Social Security reform have long pointed out that the program's solvency would eventually come to an end. Now that it potentially has – earlier than expected – it looks like a bailout maybe on the horizon. Given that Social Security will surely be considered too big to fail, someone will have to pay for it. Whether they fund the bailout through direct taxation or the indirect tax of inflation, it won't be cheap.

Rep. Paul D. Ryan (R-Wis.) has proposed "A Roadmap for America's Future," which has received some national attention lately. The Ryan proposal would preserve the current Social Security plan for people aged 55 and older. For those younger than 55, the plan would provide the option of investing more than a third of their Social Security taxes into personal retirement accounts.