A Guide to the New 2004 Social Security Trustees' Report
On March 23, 2004, 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
What is the Trustees'
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. This report includes
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 2004 Report
is the third to include the full input of these public trustees and
continues to include a great deal of additional information that
was not available 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 again 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
2004 Report shows 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 have a great deal to worry about. Even though their
parents' and grandparents' benefits are safe, theirs are not. Any
worker born after 1975 will reach full retirement age after the
trust fund is exhausted. Unless Congress acts soon, they can look
forward to paying full Social Security taxes throughout their
careers but only receiving 73 percent or less of the benefits that
have been promised to them. 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 almost $26 trillion (in 2004 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
Delay makes it even harder to reform Social
Security. Every year, there is one less year of surplus
and one more year of deficit. Once those deficits start in 2018,
the Trustees' Report shows that they will never end. Each year,
with the disappearance of another year of surplus, reforming Social
Security gets more expensive.
Delay will make it harder to run the rest of the
government. If Social Security is not reformed, by 2030 it
will require almost 13 percent of all income taxes collected that
year in addition to what the program would receive from its payroll
taxes to pay all promised benefits. By 2040, that number will
surpass 15 percent of all income taxes and it will continue to grow
after that. This will make it much harder for our children and
grandchildren to pay for government programs dealing with national
security, health, education, and the environment.
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 and 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 such accounts.
False lessons that should be
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 take in
more cash than it pays out for about fourteen years. Without the
growth that will be stimulated by the President's tax plan, future
Congresses will face a much harder task in either reforming Social
Security or paying for its deficits.
Repealing President Bush's tax cuts will make it easier to
pay for Social Security. Repealing tax cuts today will not
make it easier to pay for Social Security in the future. Social
Security does not need any additional cash to pay benefits for
about another fourteen years. During the interim, Congress will
just spend the additional money on new programs, and by the time it
might be used to pay benefits, every dollar will be committed to
new "essential" programs that cannot be cut.
Social Security's problems are so far in the future that we
don't need to worry about them. It takes about 22 years to
grow a taxpayer. Almost every new taxpayer who will begin a new
career after graduating from college in 2025 is living today and
can be counted. Similarly, everyone who will receive Social
Security retirement benefits in the year 2040 is alive and most of
them are paying taxes. Social Security's problems are based on
demographics, which don't change from year to year. The people who
will be hurt if nothing is done to fix Social Security are not
fantasy people of the future. They are our children and
grandchildren of today.
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 fund
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 2004
Report, the year that Social Security will begin to spend more in
benefits than it receives in payroll taxes remains at 2018 - the
same year that was in last year's Report. The year the "trust fund"
is exhausted also stays the same at 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 and
the aggregate amount of benefits of different types paid in that
year. It also includes data on operating expenses. In 2003, the
Old-Age and Survivors Trust Fund (which pays for retirement and
survivor's benefits) took in $543.8 billion and paid out $406.0
billion. The annual surplus was $137.8 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
- 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
the likelihood that each would occur.
- However, hidden in the details of those charts is some
What needs to be in the
Report, but has not appeared so far
How does Social Security
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
David C. John is Research Fellow in Social Security and
Financial Institutions in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.
- 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
exceed $100 billion within about five years, $200 billion after
about ten years, and $300 billion after about fifteen years.
- Between 2018 and 2079, 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)
is projected to be about $25.85 trillion (in 2004 dollars). This is
more than six times the national debt.
- In net present value terms, Social Security owes $5.2 trillion
dollars more in benefits than it will receive in taxes. That number
includes $1.5 trillion, in net present value terms, to repay the
bonds in Social Security's trust fund. This is an almost 6 percent
increase from last year.
Net present value measures the amount of money that would have to
be invested today in order to have enough money on hand to pay
deficits in the future. In other words, Congress would have to
invest $5.2 trillion today in order to have enough money to pay all
of Social Security's promised benefits between 2018 and 2079. This
money would be in addition to what Social Security receives during
those years from its payroll taxes.
- A new perpetual projection that extends beyond the usual
75-year planning horizon. In net present value terms, the perpetual
projection is $11.9 trillion, including money necessary to repay
bonds in the trust fund. Those projections show that Social
Security's total deficit continues to grow well beyond the 75-year
projection period. 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 75-year window ends.
This is important because many opponents of reform claim that
raising payroll taxes by about 2 percent, the average percentage
difference between revenues and outlays over the 75-year period,
would solve Social Security's problems. The reality, however, is
that the program's future deficits are projected to be so large
that this tax increase would still leave a huge shortfall. These
new projections should end the claims that Social Security's
impending financial crisis can be resolved with modest changes to
the current system.
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 in the unfunded liability from year
to year, using the SSA's own data. This year's Report offers
improved information, but there is still a long way to go. 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
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 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 Social Security
taxes of about 7 percent after inflation. On the other hand, a
worker born in mid-1980s 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 than their parents and
grandparents received. More important, they can see that their
children and grandchildren will receive even less from Social
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
- Information used to make projections, including
economic models and the relevant data analyzed. Social Security's trustees also should clearly
disclose any changes made in these models during the previous year.
This disclosure would allow independent researchers to verify the