Social Security System Shortfall Starts Next Year

The U.S. Social Security system will pay more money than it collects through 2011 because a great number of working seniors have been laid off and many are forced to apply for their retirement benefits sooner than expected. This will be the first time a shortage has occurred since Congress revamped the Social Security system in the early 1980s.

The deficits are expected to total $10 billion in 2010 and drop to $9 billion in 2011. Although this will add to the overall federal deficit, a surplus of $2.5 trillion already in the trust fund will prevent any impact on payments to recipients.

However, an earlier announcement stated it is unlikely people receiving Social Security will receive their usual cost-of-living increase next year. The formula for annual benefit adjustments is based on the consumer-price index for urban wage earners between the third quarter of the current year and the third quarter of the previous year. Because the period measured for 2010’s payments was marked by deflation due to sharp price decreases, there will be no increase.

The fund is supported through payroll taxes, which have decreased through the loss of 6.9 million jobs in the United States. Also, applications for retirement benefits jumped 23 percent, surprising Social Security officials. About 2.2 million applications were filed in the 10-month period ending in July, compared with nearly 1.8 million in the same period a year earlier. Combined, these conditions have imposed a strain on the system.

The number of retirees and their dependents receiving Social Security totals about 43 million, with an average monthly benefit of $1,100.

Additionally, 9.5 million people get disability benefits, with the monthly average at about $920. Just as claims have risen among retirees, applications among the disable are up about 20 percent.

America’s labor force has been getting older, with some forced to continue working because their savings have been hit hard during the economic crisis. The Bureau of Labor Statistics reports the segment of those people in their 60s who are working or seeking employment has steadily increased during the past decade. More than 55 percent of people age 60 to 64 still have jobs compared with about 46 percent 10 years ago.

As the economy recovers, there is an expectation Social Security will return to recording surpluses in 2012. Left unchecked, deficits are expected to permanently resume four years later, and the $2.5 trillion in the trust fund will be depleted in 2037. Part of the reason for the decrease is attributed to the government having borrowed some of the money to pay for other programs. The withdrawn money has been replaced by bonds that will come due after real dollars are gone.

Congress has faced pressure for some time to head off this scenario, which could lead to the end of Social Security. President Obama has said his 2010 agenda may include repairing the system.