"There are risks and costs to action.
But they are far less than the long-range risks of comfortable
inaction."
--John F. Kennedy
"We are increasingly concerned about inaction on the
financial challenges facing the Social Security and Medicare
programs. The longer we wait to address these challenges, the more
limited will be the options available, the greater will be the
required adjustments, and the more severe the potential detrimental
economic impact on our nation."
--2007 Trustees Report
The 2009 Social Security Trustees Report was released on May 12.
This paper explains the important facts and answers the frequently
asked questions about Social Security's financial outlook.
How Will This Report Affect the Social Security
Debate?
The debate about whether Social Security faces a problem and
needs to be fixed is over. The 2009 Trustees Report shows that the
program faces massive annual deficits starting in just seven years.
Now is the time to focus on solutions. Several plans to include a
savings element in Social Security would help to increase future
retirees' financial security. Instead of just blindly defending the
current program, both Congress and the Administration need to
propose comprehensive programs that permanently fix Social
Security. Opposing a potential solution is not the same thing as
coming up with a plan.
Has the Size of the Social Security Problem Changed over
the Last Year?
In net present value terms, Social Security owes $7.7 trillion
more in benefits than it will receive in taxes. The 2009 number
consists of $2.4 trillion to repay the special issue bonds in the
trust fund and $5.3 trillion to pay benefits after the trust fund
is exhausted in 2037. This is an increase of $1.2 trillion from
last year's report, half of which comes from changes to economic
assumptions and the other half from a change in the methodology
used to make the estimate.
A key factor in this year's report is the effects of the current
recession on Social Security's finances. The recession increases
the amount of benefits paid out by Social Security as older workers
who have lost their jobs choose to file for benefits earlier than
they might have otherwise. At the same time, both they and younger
unemployed workers are unable to pay Social Security taxes, while
workers who suffer a drop in their income will pay lower amounts.
This will have the effect of reducing the revenues that go to the
trust fund. Eventually, those workers will receive lower Social
Security benefits when they retire.
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 $7.7 trillion today in order to have enough money to pay all
of Social Security's promised benefits between 2016 and 2083. This
money would be in addition to what Social Security receives during
those years from its payroll taxes.
The Trustees Report's perpetual projection extends beyond the
usual 75-year planning horizon. In net present value terms, the
perpetual projection is $15.1 trillion, including money necessary
to repay bonds in the trust fund. Last year's number was $13.6
trillion. This means that the net present value deficit of Social
Security after 2083 is $7.4 trillion. These 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.
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 large and growing, so 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.
In actuarial terms, Social Security's long-term financing has
worsened from a 75-year deficit of 1.7 percent of taxable payroll
in last year's report to a deficit of 2.0 percent.
Social Security spending will exceed projected tax collections
in 2016. These deficits will quickly balloon to alarming
proportions. After adjusting for inflation, annual deficits will
reach $68.5 billion in 2020, $170.4 billion in 2030, and $293.6
billion in 2035.
Because a significant amount of the change in Social Security's
financing comes from the effects of the recession, they are likely
to regain a portion of those losses once the economy begins to
recover. Although at that point some will claim that the
improvement "proves" the viability of the current system, the
reality is that Social Security's outlook remains clouded by
perpetual deficits that will begin about 2016.
Is the Important Year to Consider 2037, 2016, or
2009?
The year when Social Security begins to spend more than it takes
in, 2016, 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 those bonds 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
increases.
A second important year is 2009--this year. Starting now, the
annual Social Security surpluses that Congress has been borrowing
and spending on other programs will begin to shrink. In fact,
because the recession has both reduced Social Security payroll tax
revenues and increased its benefit payments, Congress will have to
either find other sources to replace the money that it borrows from
Social Security or shrink spending. This year, the surplus will be
only about $18 billion, and although it is predicted to grow
slightly as the economy recovers, no longer can Social Security
surpluses be used to mask the real size of the deficit and finance
other spending.
Compared to these two dates, 2037--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 24
percent benefit reduction, Congress would have been paying about
$300 billion a year (in 2009 dollars) to repay those bonds for
about seven years by the time the trust fund runs out. Congress
will have to do this through some combination of other spending
cuts, new 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 (SSA) Chief Actuary Stephen
Goss and his staff of non-partisan experts produce the numbers in
the Trustees Report. They are respected professionals who have
never 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 2009 numbers are
substantially similar to those in the Trustees Reports issued
during both the Clinton and the Bush Administrations.
When Will Social Security Begin to Run a Cash-Flow
Deficit?
According to the 2009 Trustees Report, the year that Social
Security will begin to spend more in benefits than it receives in
payroll taxes is 2016--one year sooner than in last year's report.
The year the "trust fund" is exhausted moves to 2037, four years
earlier than in last year's report.
What Are the Operating Numbers from the Current
Year?
The Trustees Report includes detailed information about the
aggregate amount of payroll taxes paid in the previous calendar
year and the aggregate amount of benefits paid in that year. It
also includes data on operating expenses. In 2008, the Old-Age and
Survivors Trust Fund, which pays for retirement and survivors'
benefits, took in $695.5 billion and paid out $516.2 billion. Its
annual surplus was $179.3 billion, but only $74.0 billion of that
came from payroll tax receipts. The remaining $105.3 billion of the
surplus came from a paper transaction that credited interest to the
trust fund.
What Does It All Mean?
- Good News for Seniors. The benefits of current
retirees and those close to retirement remain completely safe. The
2009 report shows that the program will have enough resources to
pay full benefits until 2016. Despite political scare tactics,
seniors can rest assured that their benefits are safe and that they
will receive every cent that they are due, including an annual
cost-of-living increase.
- 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 1970 will reach full retirement age after the
trust fund is exhausted. Unless Congress acts soon, younger workers
can look forward to paying full Social Security taxes throughout
their careers but only receiving 76 percent or less of the benefits
that have been promised to them. In addition, they will have to
repay the Social Security trust fund, an expense that will total
almost $6 trillion by the time the trust fund is exhausted in
2037.
- Social Security Must Be Reformed. Today's Social
Security cannot last. The report shows that there is a 95 percent
chance that Social Security will run multi-billion-dollar annual
deficits starting in about 2016. The system has promised trillions
of dollars (in 2009 dollars) more in benefits than it will have the
ability to pay. Just repaying Social Security's trust fund will
cost about $6 trillion by the time the trust fund is exhausted in
2037.
- 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 2016, 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 2037 it
will require over 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, and its draw on the
general budget will continue to grow. 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.
Delay makes massive tax increases much more likely. The 2009
report shows that Social Security will begin to run cash flow
deficits in about seven years. However, of the three general ways
to fix Social Security, two (changing benefits and establishing
Social Security accounts) will take years to have a real effect.
Accounts of any size need to grow for about 20-25 years before they
are large enough to pay much in the way of retirement benefits.
Benefit changes are politically feasible only if current retirees
and those close to retirement are not affected, which means that it
would be at least 10 years before changes start to take effect. On
the other hand, some prefer tax increases because they would
immediately pump money into Social Security. But that band-aid
would just delay the start of real long-term reform and make it
much more likely that Congress would keep taking the easy way out
by raising taxes.
- Include a Personal Savings Element. Allowing American
workers to save and invest a portion of their income in accounts
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 a personal savings element,
workers will end up paying more taxes for fewer benefits.
False Lessons That Should Be Avoided
- Social Security's Problems Are So Far in the Future
That Americans Do Not Need to Worry About Them. It takes
about 22 years to grow a taxpayer. Almost every new taxpayer who
will begin a career after graduating from college in 2031 is living
today and can be counted. Similarly, everyone who will receive
Social Security retirement benefits in the year 2040 is alive now,
and most of them are paying taxes. Social Security's problems are
based on demographics, which do not change from year to year. The
people who will be hurt if nothing is done to fix Social Security
are not unknown people of the future: They are our children and
grandchildren of today.
- Repealing President Bush's 2001 and 2003 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 seven years. During the interim,
Congress would just spend the additional money on new programs, and
by the time it might be used to pay benefits, every dollar would be
committed to new "essential" programs that cannot be cut.
What Is the Trustees Report?
The Social Security Act requires the trustees of the Social
Security trust funds to issue an annual 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 shortfall. However, this
requirement is regularly ignored.
The trustees include the secretaries of treasury, labor, and
health and human services, the Social Security Administration
commissioner and deputy commissioner, and two public trustees
appointed by the President and confirmed by the Senate. Currently,
the two public trustee spots are vacant.
Social Security's Three Scenarios for the
Future
The trustees use three scenarios to project Social Security's
financial future. The middle scenario, called the "intermediate
projection," is the most likely to occur. That is the reason that
it is usually cited. The trustees also include 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 5
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 that plots implicit
rates of return by birth year. Similar to a chart found in the
Government Accountability Office's (GAO) 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. A worker born in
the mid-1980s, however, could expect a return of less than 2
percent. If they were provided with these figures, workers would
see that, unless the current system is reformed, they can expect
lower returns on their taxes than their parents and grandparents
received. More important, they would 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 (OMB) 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 Security
Basics" by The Heritage Foundation.[1]
David C. John is Senior Research Fellow in
Retirement Security and Financial Institutions in the Thomas A. Roe
Institute for Economic Policy Studies at The Heritage
Foundation.