March 17, 2003

March 17, 2003 | WebMemo on Social Security

A Guide to the new 2003 Social Security Trustees' Report

On March 17, 2003, the latest annual report of the Social Security's Trustees was released to the public. Most stories about this report focused on obvious facts such as when the trust fund will run out. However, there is much more to the story than just those dates. This briefing gives you an idea of how to get to the important facts behind the obvious in order to get a real picture of Social Security's financial outlook.

What is the Trustees Report:

Every year, the Social Security Act requires the Trustees of the Social Security trust funds to issue a report on the financial status of those trust funds. They include not only current financial information, but also projections about the funds' ability to finance promised benefit payments in the future. If the report shows that the trust funds will be unable to finance all of these payments (as all recent reports have), the law requires the trustees to recommend ways to make up the shortage. However, this requirement is regularly ignored.

 

The Trustees include the Secretaries of Treasury, Labor and HHS, the Social Security Administration Commissioner and Deputy Commissioner, and two public trustees appointed by the President and confirmed by the Senate.  The public trustees are Thomas R. Saving of Texas A & M University and John L. Palmer of Syracuse University. They were nominated to a five year term by former President Bill Clinton in 2000, and were approved by the Senate later that year.

 

The 2003 Report is the second one to include the full input of these public trustees, and includes a great deal of additional information that was not included in previous reports. Both trustees have spoken about the need to include more and clearer information so that the public can fully understand the state of the Social Security trust fund and the financial challenges that lie ahead. This year's Report shows the results of their efforts.

 

What does it all mean:

  • Good news for seniors: The benefits of current retirees and those close to retirement are completely safe. The 2003 Report showed that the program will have enough resources to pay full benefits until 2018. Despite political scare tactics, seniors can rest assured that their benefits are safe.
  • Bad news for younger workers: Unfortunately, younger workers may have even more to worry about. Even though their parents and grandparents benefits are safe, theirs are not. Any worker under the age of about 27 will reach full retirement age after the trust fund is exhausted. Unless Congress act soon, they can look forward to paying full Social Security taxes throughout their careers, but only receiving 73 percent or less of their promised benefits. In addition, they will have to pay about $5 trillion (in today's dollars) in additional general taxes in order to repay the Social Security trust fund.
  • Social Security must be reformed: The report shows that today's Social Security cannot last. Over time, the system has promised over $25 trillion (in today's dollars) more in benefits than it will have the ability to pay. Just repaying the amount that will be in Social Security's trust fund will cost over $5 trillion.
  • Delay makes it even harder to reform Social Security: Every year, there is one less year of surpluses and one more year of deficits. Once they start, about 2018, the Trustees Report shows that the deficits will never end. Each year, with the disappearance of another year of surpluses, reforming Social Security gets more expensive.
  • Economic growth is essential: Simply repealing the double tax on dividends will increase Social Security's revenues by over $100 billion. The President's tax plan would make it easier to pay for reforming Social Security.
  • Personal retirement accounts must be established: Allowing American workers to invest a portion of their existing Social Security taxes in an account that they would own is the lowest cost way to ensure that they have an adequate retirement income. The alternative is a combination of benefit cuts or tax increases. Without personal retirement accounts, workers will end up paying more taxes for less benefits. Polls consistently show that a large majority of Americans support President Bush's plan to establish these accounts.

False lessons that should be avoided:

  • President Bush's tax plan makes Social Security worse: Cutting taxes will not make it harder to pay for Social Security's coming deficits. Social Security will be fully funded for about fifteen years no matter what. Instead, without the growth that will be stimulated by the tax plan, future Congresses will face a much harder task in either reforming Social Security or paying for its deficits. For a further discussion, please see: President Bush's Tax Plan Would Improve the Ability to Deal with Future Social Security Deficits.

What is easy to find in the Report:

  • When Social Security Will Begin to Run a Cash-Flow Deficit: The most recent estimates on when the trust funds will begin to spend more money in benefits than it receives in taxes is usually found in the accompanying press release and in the front of the Trustees' Report. It also includes the latest estimate of when the trust fund will be exhausted. According to the new 2003 report, that year moved from 2017 to 2018. The year the "trust fund" is exhausted moved out one year from 2041 to 2042.
  • Operating Numbers From the Current Year: The Trustee's Report includes detailed information about the aggregate amount of payroll taxes paid in the just ended calendar year, the aggregate amount of benefits of different types paid in that year. It also includes data on operating expenses. . In 2002, the Old-Age and Survivors Trust Fund (which pays for retirement and survivor's benefits) took in $539.7 billion and paid out $393.7 billion. The annual surplus was $146.0 billion.
  • Dozens of Charts and Tables: Literally dozens of various technically labeled charts and tables are scattered through the Trustees' Report. Unfortunately, their actual meaning is usually much less clear.

What you will have to search for:

  • The Meaning of All Those Charts: So far, the Trustees have used three scenarios to project Social Security's financial future. The middle scenario, which is the most likely to occur, is usually cited. The Trustees have also included both a more optimistic projection and a more pessimistic projection. Although all three are listed, it is not correct to assume that there is an equal chance that each might occur. It would be far more correct if the Trustees also included what the likelihood that each would occur.

    However, hidden in the details of those charts is some critical information:

This year's 2003 Trustees' Report included this important information:

  •   Social Security spending will exceed projected tax collections in 2018. These deficits will quickly balloon to alarming proportions. After adjusting for inflation, annual deficits will reach $57 billion in 2020, $164 billion in 2025, and $322 billion in 2035.
  • The reason that the projected insolvency date (2018) is one year later is that economic assumptions have changed. The 2003 report assumes that older Americans will stay in the workforce longer that earlier reports did. In addition, the report assumes that immigration will be higher. Both changes would result in more payroll taxes coming into the system. As a result, Social Security will have enough money to pay benefits slightly longer. However, those workers will also qualify for higher Social Security benefits, which will cost the system more in later years. 
  • Between 2018 and 2078, the cumulative unfunded liability (the amount more that Social Security will have to pay in benefits during that period than it will receive in payroll and other taxes) in 2003 dollars is projected to be about $25 trillion. This is more than six times larger than the national debt. The total is about 3 percent higher than that in last year's report.
  • Comparing the 2003 report with the 2002 report, the estimated inflation-adjusted deficit in 2075 alone has jumped from $791 billion to $809 billion--an increase of more than $18 billion. By 2080, that annual deficit will reach $899 billion.
  • New projections that extend beyond the usual 75 year planning horizon into perpetuity. Those projections show that Social Security's total deficit continues to grow. In fact, the perpetual estimate is several times that of the 75 year projection. Over time, Social Security's payroll taxes will be able to pay a consistently lower percentage of promised benefits. Any reform that just eliminates deficits over the 75 year window will not be sufficient to solve the program's problems. The current system would run into renewed deficits after the 25 year window ends.

    This is important because many opponents of reform claim that raising payroll taxes by the average percentage difference between revenues and outlays over this period would solve Social Security's problems. The reality, however, is that the program's future deficits are projected to be so large that a modest tax increase would still leave a huge loss. These new projections should end the claims that a modest tax increase would solve Social Security's impending financial crisis.

What needs to be in the Report, but has not appeared so far:

  • Specific Information on the Program's Total Long-Term Outlook. The report should specify the long-term unfunded liability of Social Security in nominal and inflation-adjusted dollars, as well as any changes from year to year, using the SSA's own data. With this information, working Americans could balance any short-term "improvements" in Social Security's financial future with the higher deficits their children and grandchildren will have to pay.
  • A measure of Workers' Rate of Return. The trustees report does not include any measure of what workers actually receive for their payroll taxes. The best way to accomplish this would be to include a chart in the Trustees Report that plots implicit rates of return by birth year. Similar to a chart found in the GAO's August 1999 report on Social Security's rate of return, this chart would illustrate to Americans that the rate of return from Social Security has steadily and dramatically decreased. For instance, GAO's chart shows that a worker born around 1920 could expect a rate of return from the Social Security taxes of about 7 percent after inflation. On the other hand, a worker born in mid-1980's could only expect a return of under 2 percent. If they were provided with these figures, workers would see that, unless the current system is reformed, they can expect a lower rate of return on their taxes paid than their parents and grandparents received. More important, they can see that their children and grandchildren will receive even less from Social Security in the future.
  •   Information on the Nature of its Trust Funds and How They Differ from Private-Sector Trust Funds.

    The Office of Management and Budget explained in its fiscal year 2000 budget document that the Social Security "trust funds" do not contain stocks, bonds, or other assets that could be sold directly for cash. Unlike private-sector trust funds, the Social Security trust funds contain only IOUs that will have to be paid back with future taxes. As OMB noted:

    "These balances are available to finance future benefit payments...only in a bookkeeping sense. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits, or other expenditures."
  • Information Used to Make Projections, Including Economic Models and the Relevant Data Analyzed.

    Social Security's trustees also should disclose any changes made in these models during the previous year, which would allow independent researchers to verify the SSA's projections.

    What is the Social Security debate about?

For a quick discussion of why the Social Security debate is important and the key issues, see Heritage's Issues 2002 chapter on Social Security reform.

 

How does Social Security operate?

For a briefing on how Social Security operates, how the trust fund works, how benefits are calculated, and other features of the current system and reform options, please see Social Security Basics.

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies