On March 26, 2002, the latest annual report of the Social Security's Trustees was released to the public. Most stories about this report focus 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.
This year's 2002 Trustees' Report includes this important information:
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 reach $96 billion in 2021, $205 billion in 2026, and $324 billion in 2034.
Between 2015 and 2075, the cumulative unfunded liability in 2001 dollars is projected to be $24.1 trillion. This is more than six times larger than the national debt. Despite the "improvement" in the insolvency date to 2017, the long-run deficit has increased by $1.9 trillion.
Comparing this year's and last year's reports, the estimated inflation-adjusted deficit in 2075 alone has jumped from $677 billion to $791 billion--an increase of more than $114 billion.
The real long-term deficit would be even larger than $24.1 trillion if the trustees' report included estimates for the annual deficits after 2075. Between 2065 and 2075, annual inflation-adjusted deficits will climb from $617 billion to $791 billion. Demographic data suggest that the upward trend will continue after 2075.
What the 2002 Social Security Trustees Report Means:
Good news for seniors:
Current retirees and those close to retirement can be reassured that their benefits are safe. Because the 2002 Report shows that the year when Social Security begins to run cash flow deficits has increased from last year's estimate of 2016 to the new estimate of 2017, the program will have even more resources available to use in paying benefits. Despite political scare tactics, today's seniors can rest assured that their benefits are safe.Even though 2001 saw both a recession and the economic effects of the September terrorist attacks, Social Security's short-run financial outlook slightly improved. To a large extent, this is due to improved expectations about productivity. The productivity growth is expected to result in a stronger economy and higher tax revenues to Social Security.
[The 2002 Report also says that the date that Social Security's trust fund will run out increased from 2038 to 2041, but that is essentially meaningless. The bonds in the trust fund actually function as IOUs that must be paid off by using general tax revenue. The trust fund is really nothing more than a legal mechanism that allows Social Security to use non-Social Security money to pay benefits for a time. As a result, 2017, the date when the program begins to run cash flow deficits is far more important than the date when the trust fund runs out.]
Bad news for younger workers:
Unfortunately, the 2002 Report shows that younger workers may have even more to worry about. Even though their parents and grandparents benefits are safe, theirs are not. According to the 2002 Report, any worker who is under the age of 26 today 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 75 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.Even though the 2002 Report shows a stronger economy for now, Social Security's future becomes even bleaker. For many years, experts have said that Social Security's estimates of how long people could be expected to live - and receive benefits - were overly pessimistic. (For an example of this criticism, see http://www.ssab.gov/FreesPaper.pdf.) As a result, earlier reports underestimated the full cost that Social Security will face in paying benefits to younger workers.In the 2002 Report, Social Security improved its longevity estimates. The new, more realistic estimates show that the long-term future of Social Security will be even worse than previously expected. Since future retirees will be collecting benefits even longer, the burden on their children and grandchildren will be even heavier. As Public Trustee Tom Saving pointed out, the combined Medicare and Social Security deficits will reach 16 percent of total federal income tax revenues by 2020 and 44 percent of total federal income tax revenues by 2040. Unless something is done, our children and grandchildren will have the choice of either paying for education and defense programs or paying retirement and health benefits to their grandparents.
Support for personal accounts:
The additional year of cash flow solvency gives Congress a little more time to really save Social Security. However, the worse outlook for the future makes rapid action crucial.
The only alternative is to allow workers to invest a part of their Social Security taxes in carefully controlled investments. These personal retirement accounts would be called Social Security Part B. The President's Commission to Strengthen Social Security showed that this is feasible and cost-effective. Plans introduced in the House of Representatives and scored by Social Security show that it is not necessary to cut benefits in order to establish personal retirement accounts. Combined, Social Security Part B and the traditional program could pay full benefits to future retirees.
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 2002 Report will be the first one to include the full input of the new public trustees. When they took office in late 2000, the 2001 Trustees' Report was largely complete. Both trustees have spoke 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.
What is easy to find in the 2002 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 2002 report, that year moves from 2016 to 2017. The year the "trust fund" is exhausted moved out one year from 2038 to 2041.
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 2001, the Old-Age and Survivors Trust Fund (which pays for retirement and survivor's benefits) took in $518.1 billion and paid out $377.5 billion. The annual surplus was $140.6 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.
The Meaning of All Those Charts:
The Trustees use three scenarios to project Social Security's financial future. The middle scenario is most often used instead of either the optimistic projections or the pessimistic projections. However, hidden in the details of those charts is some critical information.
Information on the Accuracy of SSA's Projections:
According to independent experts, the cumulative shortfall is about $2 trillion worse than the above numbers suggest, since the trustees count the payroll taxes of federal employees as real revenue flows. In reality, no money changes hands. The government simply creates an accounting entry within Social Security that is offset by accounting debits across the federal workforce.
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.
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.
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."
The Cash Flow Deficit in the 75th Year.
The Trustees' Report should also disclose its own figures on Social Security's deficit in the last year of the long-term projection period. This number will be enormous without further reform. Current projections show that the gap between Social Security revenues and outlays will grow exponentially over the next 75 years.
Many opponents of reform nonetheless 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. Disclosing this information would end the claims that a modest tax increase would solve Social Security's impending financial crisis.
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.
David John is a Research Fellow at The Heritage Foundation.