A Guide to the 2005 Social Security Trustees' Report
The annual Social Security Trustees report was released March
23. This briefing examines the important facts and provides a real
picture of Social Security's financial outlook.
How will this report affect the Social Security
The debate about whether Social Security faces a problem
and needs to be fixed is over. The 2005 trustees report shows that
the program faces massive annual deficits starting in just 12
years. The report reinforces the need to fix Social Security. Now
it is time to focus on solutions. Several plans to establish
personal retirement accounts have been shown to fix Social
Security. Now it is time for account opponents to present
comprehensive programs that permanently fix Social Security.
Opposing a potential solution is not the same thing as coming up
with a plan.
What is the size of the Social Security problem compared
to last year?
- In net present value terms, Social Security owes $5.7 trillion
dollars more in benefits than it will receive in taxes. That number
includes $1.7 trillion, in net present value terms, to repay the
bonds in Social Security's trust fund. This $500 billion increase
is almost 9 percent higher than last year's $5.2 trillion number.
The 2005 number consists of $1.7 trillion to repay the special
issue bonds in the trust fund and $4.0 trillion to pay benefits
after the trust fund is exhausted in 2041.
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 $5.7 trillion today in order to have enough money to pay all
of Social Security's promised benefits between 2017 and 2080. This
money would be in addition to what Social Security receives during
those years from its payroll taxes.
- The perpetual projection extends beyond the usual 75-year
planning horizon. In net present value terms, the perpetual
projection is $12.8 trillion, including money necessary to repay
bonds in the trust fund. Last year's number was $11.9 trillion.
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
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 not only so
large but even growing 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.
- Social Security spending will exceed projected tax collections
in 2017. These deficits will quickly balloon to alarming
proportions. After adjusting for inflation, annual deficits will
exceed $100 billion in 2022, $200 billion in 2027, and $300 billion
- Between 2017 and 2080, 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 over $25 trillion (in 2005 dollars). This is more
than six times the national debt.
Is the important year to consider 2041, 2017 or
The year when Social Security begins to spend more than it
takes in, 2017, is by far the most important year. From that point
on, Social Security will require large and growing amounts of
general revenue money in order to pay all of its promised benefits.
Even though this money will technically come from cashing in the
special issue bonds in the trust fund, the money to repay them will
come from other tax collections or borrowing. The billions that go
to Social Security each year will make it harder to find money for
other government programs, or require large and growing tax
A second important year is 2008. Starting in just a couple
years, the annual Social Security surpluses that Congress has been
borrowing and spending on other programs will begin to shrink. From
that point on, Congress will have to find other sources to replace
the money that it annually borrows from Social Security or shrink
spending. Between 2009 and 2017, this annual amount will grow to
about $100 billion annually.
Compared to these two, 2041, the year that the Social Security
trust fund runs out of its special issue bonds, has little
importance. Even though the end of those bonds will require a 26
percent benefit reduction, Congress would have been paying over
$300 billion a year (in 2005 dollars) to repay those bonds for
about 7 years by the time the trust fund runs out. They will have
to do so through some combination of other spending cuts, newer
taxes or additional borrowing. These are the same choices Congress
would face without the trust fund.
Did politics influence the trustees report?
No. Social Security Administration Chief Actuary Stephen
Goss and his staff of non-partisan experts produce the numbers in
the trustees report. They are respected professionals who never
have been, and are not subject to political pressure. Goss has been
at SSA since 1973, and is internationally respected. Although
members of the president's cabinet serve as trustees, they have
little influence over the numbers. The 2005 numbers are
substantially similar to trustees reports issued during the
presidency of Bill Clinton.
When will Social Security begin to run a cash-flow
According to the new 2005 Report, the year that Social
Security will begin to spend more in benefits than it receives in
payroll taxes remains at 2017 - one year earlier than last year's
Report. The year the "trust fund" is exhausted also moves up a year
to 2041 from last year's 2042.
What are the operating numbers from the current
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 2004, the Old-Age and Survivors Trust Fund (which pays
for retirement and survivor's benefits) took in $566.3 billion and
paid out $421.0 billion. The annual surplus was $145.3 billion.
What does it all mean?
- Good news for seniors. The benefits of current
retirees and those close to retirement remain completely safe. The
2005 Report shows that the program will have enough resources to
pay full benefits until 2017. Despite political scare tactics,
seniors can rest assured that their benefits are safe and that they
will receive eveny cent that they are due including an annual
- 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 1974 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 74 percent or less of the benefits that
have been promised to them. In addition, they will have to pay
about $6 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 2005 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 a
total of about $6 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 2017,
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 2028 it
will require about 10 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 2041, 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
- 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.
- 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 12 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 12 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.
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 four-year term by former
President Bill Clinton in 2000 and were approved by the Senate
later that year. Both public trustees' terms expired last fall.
However, the law allows them to continue in office until the next
trustees report - the one issued on 3/23/05 - is issued.
The 2005 Report is the fourth 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
Social Security's three scenarios for the
The Trustees use three scenarios to project Social Security's
financial future. However, only the middle scenario, called the
"intermediate projection", is the most likely to occur. That is the
reason that it 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. In
fact, there is a less than five percent chance that either of the
other two scenarios will occur.
What's missing from the Report?
- 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 expenditures.
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, see Social
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.
For a further
discussion, please see President
Bush's Tax Plan Would Improve the Ability to Deal with Future
Social Security Deficits.