March 25, 2004

March 25, 2004 | WebMemo on Social Security

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 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. 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 trillion.
  • 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 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 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.[1]
  • 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 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 the likelihood that each would occur.
  • However, hidden in the details of those charts is some critical information:

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


    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.

    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 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 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 Security.
  • 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 clearly disclose any changes made in these models during the previous year. This disclosure would allow independent researchers to verify the SSA's projections.

About the Author

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

Related Issues: Social Security