American workers should receive complete and accurate information about the Social Security program and the benefits they can expect to receive from Social Security in their retirement. Most Americans know far too little about the Social Security program, and much of the information provided by the Social Security Administration (SSA) does little to edify them. By requiring the Social Security Administration to expand the information it provides in its new personal benefit statements, improve the annual report of the trustees of Social Security's trust funds, and release data from its Continuous Work History Sample (CWHS) for independent analysis, Congress would ensure that Americans are given better information on Social Security.
The Social Security Right to Know Act (H.R. 3578), introduced by Representatives John Sununu (R-NH) and Jerry Weller (R-IL), would require the SSA to make these types of reforms.1 Its proposed modifications to the SSA's "Your Social Security Statement" (YSSS) and the annual Trustees' Report would give Americans access to data and information previously hidden in highly technical publications of the Social Security Administration, the White House Office of Management and Budget (OMB), and the U.S. General Accounting Office (GAO). Such information would provide an accurate and unbiased assessment of Social Security's future and the true nature of its trust funds.
The bill also would require that data in the SSA's Continuous Work History Sample be made available to qualified researchers, enabling them to forecast more accurately the future of the program and the effects of any potential changes. The changes in H.R. 3578 would cost little financially because they simply add existing information to current products. However, they would encourage a more informed debate across America on the future of Social Security.
Although Social Security is the government's most popular program, many Americans know little about how it operates and how its benefits compare with the returns from other retirement investments. For example:
Millions of Americans remain convinced that Social Security maintains a savings account in each of their names, even though there is no direct connection between the amount of taxes paid and the benefits an individual eventually receives in retirement.2
Few Americans realize that the current rate of return for Social Security taxes for a household of two working, 30-year-old earners with children averages a mere 1.2 percent,3 or that Social Security will be insolvent by the year 2015 unless it is reformed.4
Academic and other qualified researchers are still denied access to SSA information that would allow them to evaluate alternative plans that could increase the retirement security of future generations.
Currently, the long-term unfunded liability of the Social Security Old-Age and Survivors Insurance and Disability Insurance (OASDI) trust funds is projected to begin cash flow deficits in 2015. While workers are being told that they will receive a specific dollar amount in their retirement from Social Security, they are not being told that the money may not be there for them.5 H.R. 3578, like other bills in the Senate, seeks to correct this deficiency and improve the public understanding of the Social Security program.
Expanding the Benefit
In October 1999, the SSA began mailing the new Your Social Security Statements to an estimated 123 million workers annually.6 These statements include an accounting of Social Security taxes the individual worker has paid to date, the worker's eligibility status for benefits, and an estimate of the various types of benefits the worker and/or the family could receive under different circumstances. For most Americans, the YSSS will be the sole source of official information on the benefits they should receive in retirement; yet these statements downplay or omit important information about those benefits.
- Inform workers about how Social Security's projected financial difficulties could affect payment of their benefits.
Although recent statements to workers include a general paragraph that mentions these problems, the information is hidden at the end of a letter from Social Security Commissioner Kenneth Apfel and is easy to overlook. In addition, the reference to Social Security's financial problems does not openly apply these problems to the individual worker and his or her personal benefits. The warning should be less ambiguous to inform the YSSS recipient of these problems and to highlight their effects on him or her specifically.
For example, the section of the YSSS that provides estimates of the worker's benefits should begin with a specific statement in bold type, such as: "You will be eligible to receive full retirement benefits in 20XX. In that year, Social Security will receive only enough taxes to pay for xx% of these benefits. Through 20XX, the difference will be made up from the Social Security OASDI trust funds, but after that date, changes may be required."
A similar disclosure is required of underfunded private pension plans by the U.S. Department of Labor. It is only fair to require Social Security to match this standard and provide accurate information about its future to its beneficiaries.
- Require the SSA to include information on the nature of its trust funds and how they differ from private-sector trust funds.
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.7
Americans should understand 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.
- Require the SSA to include the worker's estimated rate of return on the Social Security retirement taxes paid.
For example, the SSA should include a chart that plots implicit rates of return by birth year, similar to the chart found in the GAO's August 1999 report on Social Security's rate of return.8 This chart would illustrate to Americans that the rate of return from Social Security has steadily and dramatically decreased. Recipients of a YSSS 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.
Because YSSS funding is already included in the federal budget, the cost of making these improvements in the information on the statements would be minimal. By doing so, however, Congress could ensure that millions of workers and their families are better able to plan for their retirement years.
Improving the Trustees'
Every spring, Social Security's trustees issue an annual report about the trust funds' financial condition. The 2000 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds includes over 200 pages of charts, tables, and other detailed information. Regrettably, some of the most important facts about Social Security are buried in the report while others are missing entirely.
- Require the annual Trustees' Report to include specific information on the program's total long-term outlook.
The report would 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.
For example, when the 2000 Trustees' Report was released earlier this year, news stories focused on the finding that Social Security would not run cash flow deficits for an additional year and that its trust funds would not be exhausted for another three years. Most of the stories did not include the fact that in the past year, the gap between the cost of the benefits promised for the next 75 years and the taxes that would be available to pay for them increased by 7 percent to $21.6 trillion (after adjusting for inflation).9
H.R. 3578 also would require the SSA to disclose in its annual report 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.
Like its requirements for improving the YSSS, H.R 3578 would require the Trustees' Reports to include information on the actual nature of the Social Security trust funds and how they differ from private-sector trust funds in that they are a collection of IOUs to be paid with future taxes.
- Require the SSA to disclose the information used to make its projections, including both its economic models and the relevant data analyzed.
In sum, the provisions of H.R. 3578 that require changes in the annual Trustees' Report would provide American workers with much better information about the future of Social Security. As is the case with improvements in the benefit statements, the cost of changes in the report would be minimal; yet the impact on the public understanding of the Social Security program and its trust funds would be profound.
Releasing Sample Data for Independent
H.R. 3578 would also require the SSA to release its Continuous Work History Sample data to bona fide non-federal researchers. The CWHS is a random sample of the earnings and benefit histories of about 1 percent of Social Security participants.
Currently, access to the CWHS is restricted to a small group of government researchers, most of whom are in the SSA or the U.S. Department of the Treasury. Independent analysts cannot properly explore many of the central questions of Social Security reform because they lack access to these data, which contain real wage and benefit histories. Researchers could use the CWHS data to conduct detailed analyses of the effects of the current system and proposed reforms on key demographic groups, such as women, minorities, and low-income workers.
One concern in releasing these data is preserving the confidentiality of those surveyed. However, safeguards already are in place; information that could be used to link the data to specific individuals, such as names, addresses, and Social Security numbers, currently is removed from the sample to ensure privacy.10 As an additional measure to guarantee confidentiality, H.R. 3578 would allow the SSA to edit or format any CWHS data it releases.
Access to data from the CWHS was restricted in 1974. Before that time, private industry, state and local governments, and academic researchers used CWHS data for purposes ranging from forecasting the demand for government services to studying changes in income distribution. Today, there is widespread support within the government and among independent researchers for the release of these data.
Two panels of leading social scientists from the National Research Council (a branch of the National Academy of Sciences) have called for release of the CWHS data and have suggested a number of ways in which the confidentiality of the information could be preserved.11
H.R. 3578 and similar bills before the Senate would not change any of Social Security's benefit programs. Instead, they aim to ensure that workers receive the information they need to prepare for the future. The legislation would require the Social Security Administration to include more information in its new benefit statements and in the annual Trustees' Report. This information would help average Americans understand how proposed reforms could affect their retirement income. Moreover, releasing data from Social Security's Continuous Work History Sample to researchers would ensure that independent analysts can examine how different reforms could affect the economy and various socioeconomic groups.
Workers should be told the truth about Social Security's financial future and its impact on the retirement benefits they expect to receive. As taxpayers, they have a right to this information, which could be provided by the Social Security Administration at little or no cost. Telling the whole truth to Americans about Social Security is long overdue, and the types of reforms proposed in H.R. 3578 would go a long way toward doing this, enhancing the quality of the Social Security debate and enabling Americans to plan more appropriately for their retirement years.
David C. John is Senior Policy Analyst for Social Security at The Heritage Foundation.
1. Several bills introduced in the Senate also seek Social Security reform by improving information in benefit statements and the Trustees' Report. Senator Rick Santorum (R-PA) has introduced the Social Security Right to Know Act (S. 2364), which would make similar changes in the benefit statements and the annual Trustees' Report. Senator John McCain (R-AZ) has introduced the Straight Talk on Social Security Act (S. 2381), which includes the same provisions on the YSSS as the Sununu-Weller bill. Finally, S. 2249, introduced by Senators Judd Gregg (R-NH), Robert Kerrey (D-NE), John Breaux (D-LA), and Evan Bayh (D-IN), also seeks to improve the Trustees' Report.
2. The formula used to determine Social Security benefits is based on an individual's inflation-adjusted earnings history, not on the taxes he or she pays. Since 1940, retirement taxes have increased from a combined employer-employee rate of 2 percent on the first $3,000 of earnings to 10.6 percent of the first $76,200 of earnings. Meanwhile, the benefits formula has been based on earnings throughout that period.
3. "Social Security's inflation-adjusted rate of return is only 1.23 percent for an average household of two 30-year-old earners with children in which each parent made just under $26,000 in 1996." See William W. Beach and Gareth G. Davis, "Social Security's Rate of Return," Heritage Foundation Center for Data Analysis Report No. CDA98-01, January 15, 1998, p. 1.
6. In order to receive a YSSS, a worker must be at least 25 years old and have annual earnings, a Social Security number, and a valid current address. Also, the worker must not be receiving Social Security benefits.
10. For additional information on the CWHS, see Gareth G. Davis, "Empowering an Informed Debate on Social Security: Why Congress Must Act to Ensure Access to the Continuous Work History Sample," unpublished memorandum available from the author on request, 1998.
11. National Research Council, "The Aging Population in the Twenty First Century," Washington, D.C., 1988, and National Academy Press and National Research Council, Private Lives and Public Policies: Confidentiality and Accessibility of Government Statistics (Washington, D.C.: National Academy Press, 1993).