RAY SUAREZ: Tonight, we examine the present and future financial condition of Social Security. For that, we turn to David Walker, chief of the Government Accountability Office, the government's own official and nonpartisan watchdog agency. In the early 1990s, Walker served as public trustee for Social Security and for Medicare.
And welcome to the program.
DAVID WALKER: Good to see you, Ray.
RAY SUAREZ: Now, the Social Security trustees have projected that over 75 years there's going to be a $3.7 trillion shortfall. How do they arrive at such a number over such a long period of time?
DAVID WALKER: Well, they're required by law every year to come out with the current and projected financial condition of Social Security over the next 75-year period.
And when they do that, they have best estimates, high-cost estimates and low-cost estimates. The number that you came up with is based upon their best estimate. They project how much the revenues are going to be over the next 75 years, how much the expenditures are going to be.
They calculate the difference, and the $3.7 trillion number is how much money they estimate that we would have to have today invested at treasury rates to be able to close the gap.
RAY SUAREZ: In general, how reliable have these so-called best estimates been over the years?
DAVID WALKER: Well, over the years, the actual results have been close to the intermediate or best estimate assumption. And to the extent there's been any variances, it's been more toward the higher cost assumption.
RAY SUAREZ: Now, if something happens that just falls outside the assumptions they make-- if more people are born, if more immigrants come, if people live longer-- that 75-year estimate could end up being very different?
DAVID WALKER: Absolutely. It could change. It depends upon how the variance would occur and the nature of what the variance would be. For example, if people live longer, generally it means that it's going to cost more for Social Security unless they work longer.
Furthermore, if we have larger immigration, that could help a little bit, but it's not going to help a lot because people are ultimately going to receive Social Security benefits. On the other hand, if we have other types of changes-- for example, if we start having more babies in greater numbers than we have in the past-- well, that could help, as well.
RAY SUAREZ: Now, people will often hear Social Security referred to as a pay-as-you-go system. What does that mean?
DAVID WALKER: It means that for the most part, Social Security has been designed such that the people who are paying payroll taxes today are paying for the retirement benefits of individuals who are retired today.
Now, in 1983, as you know, there was a Social Security reform that provided for partial pre-funding, where it was understood that there would be a buildup of surpluses in the so-called trust funds in order to be able to help advance funds for part of the cost of the baby boom retirement.
But they knew that they had not solved the problem and they were going to have to come back one day because of known demographics, and here we are.
RAY SUAREZ: You referred to the trust fund and the years that we've had this surplus, people paying more into the system than beneficiaries have been taking out. Well, when the government runs a deficit, what gets put into the trust fund?
DAVID WALKER: Government bonds. Basically what ends up happening is -- take last year for example -- the government ran a on-budget deficit of about $568 billion. Social Security had a surplus of about $151 billion.
That money was spent on government operating expenses, and the government put back into the so-called trust funds a government bond that is backed by the full faith and credit of the United States government.
It's guaranteed as to principle and interest. But basically all it is, is a priority claim on future general revenues. It's not readily marketable and ultimately we're going to have to raise the cash to be able to pay benefits.
RAY SUAREZ: So, someday the government is going to have to find the money somewhere to pay back what it borrowed from Social Security?
DAVID WALKER: When it has to start cashing in the bonds, it's going to have to either raise additional revenues, cut spending elsewhere in the government budget or go to the public and borrow more funds to be able to raise the cash to pay benefits.
RAY SUAREZ: Now, during recent debates about Social Security, there have been some trigger years talked about. Let's run through them quickly. What happens in 2008?
DAVID WALKER: In 2008, several things happen. Number one, the first baby boomer reaches age 62, and that's the early retirement age for Social Security. But it's also the first year in which the annual surpluses in Social Security will start to decline.
And when those annual surpluses start to decline, it means it will put additional pressure on the balance of the budget because the Congress has gotten used to being able to spend these surpluses for other items. When the surpluses start coming down, it's going to become the beginning of a withdrawal period.
RAY SUAREZ: The next year people talk about is 2018. What happens then?
DAVID WALKER: Well, in 2018, you actually run a negative cash flow, where the amount of payroll taxes that are coming in and other income that are coming in will be less than the amount of benefits and expenses that have to be paid.
And so what happens in 2018 is you have to start cashing in these IOU's, these government bonds, and the government's either going to have to raise additional revenues, they're going to have to cut other government spending, or they're going to have to go out and borrow more from the public, either domestically or internationally, to be able to pay benefits.
RAY SUAREZ: And much further out, 2042 or 2052, depending on whose numbers you're using?
DAVID WALKER: Twenty-forty-two for the Social Security trustees, their best estimate assumption; that's when the trust fund becomes exhausted. That's when the trust fund runs dry.
And in 2042, if nothing is done -- and let's hope that something is done long before that -- then peoples' benefits are going to have to be adjusted dramatically. Basically, there will be revenues for about 73 cents for every dollar of promised benefits, and you'll have to end up reconciling that 27 cent difference. And it gets worse as time goes on.
RAY SUAREZ: Meaning that you won't be able to pay even 73 cents?
DAVID WALKER: That's correct. As time goes on, you know, the 73 goes down to 70, goes down to 69, because the problem that we have is that in 1950, we had 16 people paying into Social Security for every person that was receiving benefits. Today, we have 3.3:1. We're going down to 2:1. And demographics are destiny, as has been said before.
RAY SUAREZ: Now, the Congressional Budget Office uses 2052 as their same number for that process happening. How do they arrive at a different year?
DAVID WALKER: Well, as you can imagine, Ray, when you're looking out 75 years, there are a lot of assumptions that you have to use with regard to demographics and economics and, you know, a variety of other factors.
They have somewhat different assumptions than the Social Security actuaries, one of which has to do with estimated growth in the economy. But the bottom line is, is that both CBO and the independent nonpartisan actuaries of Social Security say we have a large and growing problem that needs to be solved.
RAY SUAREZ: Now, whether you use the 2042 or the 2052 year, the president has talked about the system being bankrupt at that point. Is that, strictly speaking, the best word to use?
DAVID WALKER: Well, frankly, one of the things I like to do in Washington especially is to go to Webster's, because many times words are used in Washington that don't have the same meaning as Webster's. One example, frankly, is "trust funds."
But in this particular case, when you talk about "bankrupt," I think an accurate statement would be, is in 2042, the program would be "insolvent," meaning that it would not be able to pay full promised benefits when due.
But it would never be bankrupt in the sense that it would never be able to discharge any of its obligations. Even in 2042, Social Security can still pay 73 cents for every dollar of promised benefits. But don't get me wrong. It, clearly, for a lot of reasons, would be prudent to act sooner rather than later because we do have a large, known and growing financing problem.
RAY SUAREZ: David Walker of the GAO thanks for being with us.
DAVID WALKER: Thank you very much, Ray.