BEYOND THE NUMBERS
Instead, the main damage was on the income side, in the form of lower tax revenues and less interest.
As the Social Security actuaries have noted, the projections in the 2008 Trustees’ report — published in April of that year — didn’t anticipate the financial crash and the deep recession. (Neither did other projections around that time.) Comparing those 2008 projections with the actual outcomes roughly measures the recession’s effect. As the chart below shows, DI income in 2014 fell more than 20 percent below the Trustees’ projection, whereas DI spending — after being briefly higher — was slightly lower than projected.
At the end of 2014, the DI trust fund held $60 billion in assets — $152 billion less than foreseen in 2008. Here’s how economic developments worsened DI’s finances over that period:
- Lower tax revenues. Most of DI’s income comes from its 0.9 percentage-point share of Social Security’s 6.2 percent tax on wages, salaries, and self-employment income, which employees and employers each pay. As the recession battered employment and earnings, Social Security’s taxable payroll fell far short of the 2008 projections. A quirk in the law governing automatic adjustments amplified the gap: when there’s no cost-of-living adjustment (COLA), the Social Security taxable maximum is frozen. Over the 2008-2014 period, the tax shortfall exceeded $115 billion, or more than 75 percent of the decline in the projected trust fund balance.
- Lower interest income. Interest on the trust fund’s holdings of Treasury securities is a smaller, but significant, source of income. Both the size of the trust fund and the level of interest rates fell below pre-recession forecasts. Over the 2008-2014 span, interest income fell nearly $25 billion short of projections, more than 15 percent of the deterioration in the trust fund’s balance.
- Temporarily higher spending. The recession boosted the number of DI beneficiaries; by the end of 2014, the number of disabled-worker beneficiaries was 350,000 (or 4 percent) higher than the Trustees projected back in 2008. (The impact of recessions on DI beneficiaries is often overstated. High unemployment typically causes applications to soar, but awards rise more modestly.) Of course, more beneficiaries mean greater spending. But by 2014, DI spending actually fell below pre-recession predictions. That’s because — after a spike in gasoline prices in summer 2008 caused an unexpectedly large 5.8 percent COLA in January 2009 — subsequent COLAs came in well below the 2008 forecast. It’s also because stagnant wages — which influence the average dollar size of new awards — likewise drove down outlays. Over the entire 2008-2014 period, DI spending was $12 billion higher than the 2008 projections (less than 10 percent of the trust fund’s deterioration) — and by 2014, spending was lower than the Trustees had predicted.
In short, the DI trust fund is in poorer shape than experts expected before the Great Recession —though that follows a long period when it performed much better than forecast. As a result, the fund must be replenished in 2016 — exactly as projected when lawmakers last reallocated taxes in 1994. The financial deterioration doesn’t indicate a “failing” or “unsustainable” program.