Recession bad for Social Security

For the time, in close to three decades, the Social Security will be compelled to dole out more in benefits than it collects in taxes during the next coupe of years.

The reason is huge job losses and an increase in the early retirement claims from laid-off people.

Surging applications
The deficits, estimated at $10 billion in 2010 and $9 billion in 2011, will, however, not lead to cash-out situation as the Social Security already has accumulated surplus of $2.5 trillion.

There is a 23 percent hike in applications for retirement benefits compared to last year. As many as 2.2 million opted for Social Security retirement benefits from October through July this year vis-à-vis 1.8 million applications in the comparative period last year.

Alan J. Auerbach, an economics and law professor at the University of California, Berkeley opined, “A lot of people who in better times would have continued working are opting to retire. If they were younger, we would call them unemployed."

The disability claims have also risen by a fifth. A large proportion of the people who had been working in spite of their disabilities are submitting an application for benefits after losing their jobs.

"When there's a bad recession and we lose 6 million jobs, people of all types are going to be part of that," said Stephen C. Goss, the Social Security Administration's chief actuary.

An issue that needs fixing
As things stand, Social Security is likely to be back on track and start generating surpluses again in 2012.

Kent Smetters, an associate professor at the University of Pennsylvania's Wharton School differs, "The thing to keep in mind is that it's unlikely we are going to pull out (of the recession) with a strong recovery. These deficits may last longer than a year or two."

Given its revenue model and the impending claims, it will permanently return to deficits in 2016.

The $2.5 trillion surplus in Social Security's trust funds will reach zilch unless the government shores up the program. President Barack Obama has already promised to tackle the issue of Social Security next year.

In the interim, it has already been decided that there will be no cost-of-living adjustment (COLA) beginning January next year. Thus the beneficiaries will not get the normal 2 percent to 3 percent increase that they normally get every year.