Criminals know that people who are distracted might forget to keep an eye on their valuables. It's just happened to us as a nation.

We have all been so busy whining about bonuses at American International Group Inc. and arguing about the so-called card-check legislation that we forgot to watch the Social Security surplus. While we were looking away, that surplus disappeared, eight years ahead of schedule.

Something extraordinarily important was revealed in mid- March and received almost no news coverage. If you typed in the words "Social Security" on Google's news service last Friday, the top hit was a New York story about a man who kept his dead mother in a freezer ever since she died back in 2007, just so he could continue to collect her benefit checks.

Almost as gruesome is the news about Social Security's finances. Social Security has for years been the near-term bright spot in the federal budget. Each year the program has raised $50 billion to $100 billion more in payroll taxes than it paid out in benefits. Sure, deficits were expected far off in the future, but the current program was on sound financial footing.

Those days are, for the moment at least, behind us. According to the latest Congressional Budget Office estimate, the Social Security surplus will be only $3 billion in 2010. That number is almost surely too rosy, and the actual realization next year will be a big deficit. In February, according to data from the Social Security Office of the Actuary, the program paid out more in benefits than it collected in taxes and interest combined. There will be many more months like that before we are through.

Impact of Recession

Why did the program's finances change so much, so fast? This recession has led to a big reduction in employment, and that reduces payroll tax revenue. Moreover, people losing their jobs tend to retire early or go on disability, so payouts rise too.

But there is another force at play. In the past few years, the CBO twisted its own assumptions to make Social Security's financial future look sounder. Only now can we see the damage that has been wrought by the attempt to downplay the crisis.

Opponents of Social Security reform have tried for years to underplay the problem by stating that the program's finances are fine. Social Security was, in the most recent report by its trustees, expected to run surpluses all the way to 2017. Why bother to reform something now if the crisis is so far off?

This assertion has been so prevalent that my institution, the American Enterprise Institute, even sponsored an event back in 2007 with the title, "Are the Social Security Trustees Reports Too Pessimistic?"

Warning of Crisis

At that event, Hudson Institute scholar Chuck Blahous, who was leading President George W. Bush's Commission to Strengthen Social Security, made the compelling case that those predicting a Social Security financing crisis were basing that on sensible assumptions. Blahous was pilloried by the left, but we now know he was far more right than even he could have dreamed.

Reformers like Blahous have pointed out that the retirement of the baby boomers guarantees that Social Security will run out of money, and that the changes necessary to fix the system will be much smaller if we enact them many years in advance. Sadly, it may now be too late. No longer can we wait until 2017 for the deficit to arrive; it's here already.

It's true that the CBO projects that the program will resume generating near-term surpluses once this recession is behind us, but that projection is excessively optimistic for three reasons.

First, the CBO's economic projections call for growth to resume next year at a healthy pace, something that seems more and more questionable given the persistent financial crisis.

Permanent Changes

Second, many individuals who retire early or go on disability in this crisis may not return to the workforce once the recession ends, so the higher payments are probably with us forever.

Finally, Social Security just increased everyone's benefits by 5.8 percent to cover the increase in the cost of living last year, the biggest increase since 1982. That adjustment jacks up benefits payments permanently.

So this year, the "on-budget" side of the government will run the biggest deficit relative to gross domestic product since World War II. And now we at least can envision that U.S. Treasury needing to kick in general revenues to finance the payment of Social Security benefits.

That means benefits payments will be under more stress than they have been in modern times. To the extent that the federal government continues to pump money into assorted bailouts and rescues, it will undermine its ability to support a retirement program that is now a drag on the overall picture.

The only responsible course is to do what reformers have been advocating for at least a decade, a step that worked in 1983: Establish a bipartisan commission to recommend fixes to Social Security, and implement them now. The myth that we can postpone reform because everything is just fine has been exposed as such. The time to act is now.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.