run, nor does it take into account the broader budget implications of financing benefits outside the revenue streams now dedicated to the program. For instance, system solvency could be accomplished in a program-accounting sense by the federal government’s issuing new bonds to the trust funds or raising the interest rate on existing trust fund bonds. But from a whole-budget perspective, this accounting approach would not generate additional real resources to pay benefits. For that reason, this solvency concept can be criticized as allowing the risk that future generations must pay for current Social Security benefits; that is, improving program solvency (so defined) is not sufficient to achieve long-run self-financing.

Positive Cash Flow

If the Social Security system has a positive cash flow in any year, it means that revenues dedicated to the system are at least as large as those required to pay scheduled benefits. If the cash flow becomes negative, it would require cutting benefits, raising taxes, or redeeming trust fund assets. Under current law, cash-flow deficits will begin in 2017 and grow continually, exceeding 6 percent of the nation’s payroll by 2075 ($1.36 trillion dollars in 2001 dollars).

Asking that the system have positive annual cash flows is a straightforward and easy-to-understand objective: either Social Security is taking in more money than it must spend, or it is not. This principle is also consistent with the tradition of having Social Security be self-financing, and it does not require an understanding of the complexities of trust fund accounting. A drawback is that it does not indicate how soon the program would (or should) attain self-financing status, nor how it could (or should) be financed in the meantime, nor the role of the trust fund in financing benefits. Thus, meeting this goal is not, by itself, sufficient to ensure the long-term solvency of the program.

The 75-Year Actuarial Balance

Under current practice, Social Security actuaries report the actuarial balance of the retirement and disability programs as the net present value of Social Security system, that is, the present value of expected revenues minus the present value of scheduled expenditures over the “valuation period” of time that is used.1 The valuation period has historically been 75 years; recently, however, an in-perpetuity accounting period also has been reported. The use of the 75-year valuation period led to the computation that the 75-year shortfall in 2009 was equivalent to 2 percent of the nation’s taxable payroll. Although it is a useful mechanism for quantifying the magnitude of the financing shortfall, averaged over the valuation period, it has several



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