Why Paul Krugman's Social Security Calculation Is Off by $26.5 Trillion

Krugman writes about Social Security, in a column titled: The Geezers Are All Right:

The retirement program’s trustees do foresee rising spending as the population ages, with total payments rising from 5.1 percent of G.D.P. now to 6.2 percent in 2035, at which point they stabilize. This means, by the way, that all the talk of Social Security going “bankrupt” is nonsense; even if nothing at all is done, the system will be able to pay most of its scheduled benefits as far as the eye can see[...]The truth is that the long-term outlook for Social Security and Medicare, while not great, actually isn’t all that bad.

James Hamilton explains why Krugman is wrong:

The Social Security trust fund ended 2012 with $2.6 trillion in assets. Under current law, the trustees anticipate this account to be drawn down gradually and become negative after 2035, an event that is sometimes referred to as "running out of money." But the $2.6 T in current assets consist of nothing more than a big I.O.U. from the U.S. Treasury to the Social Security trust fund. Where are the assets that the U.S. Treasury is holding that would enable it to make these payments? They don't exist. Taxes will have to be raised, other programs cut, or the Treasury will have to borrow more from the public in order to deliver the funds that Social Security is assuming it's going to be receiving from the Treasury between now and 2035.

Where did the $2.6 T balance come from? It represents the accumulated amount by which Social Security taxes generated more money for the government than have been spent on beneficiaries up to this point. But that surplus from Social Security didn't go to acquire any real asset that could be used at this point to pay beneficiaries. The money has already all been spent on other programs. If the Treasury is going to pay this $2.6 T to Social Security, the funds have to come from tax increases, spending cuts, or more borrowing.

And then it get much worse. Hamilton, again:

The $2.6 T is an estimate of the size of the present value of the additional funding that would be needed to take us through 2035 given current Social Security benefit and tax schedules.

And what about beyond that? Another interesting calculation is the following. Suppose you took all the people who are over 15 years old today and asked what would be the present value of the cost of providing Social Security benefits to that group based on the current schedules. The answer is given in Table IV.B7 of the report-- $52 T. For comparison, the present value of Social Security taxes collected to cover those payments is calculated to be $25.5 T. In other words, providing all the benefits that have been promised to current program participants (both workers and retirees) requires coming up not just with an additional $2.6 T but instead somewhere finding an extra $26.5 T.