March 30, 1999
Understanding the Financial Status of the
Social Security System in Light of the 1999 Trustees Report
by Kilolo Kijakazi, Wendell Primus, and Robert Greenstein
The Social Security Board of Trustees today released the 59th annual report on the program's financial and actuarial status. The report shows an improvement in the program's long-term fiscal status due primarily to the continued strong performance of the U.S. economy and improved prospects for the economy's future performance.
The Social Security trustees reaffirmed that Social Security does not face a near-term crisis. Payroll tax revenues currently exceed benefit payments and are resulting in the accumulation of a steadily growing surplus that will allow benefits to be paid in full for the next 35 years. In the long term, however, the system will face an imbalance. The 1999 trustees' report includes three important dates related to the imbalance.
- The Social Security actuaries project that in 2014, benefit payments will begin to exceed the combination of payroll tax revenues and funds that Social Security receives from the taxation of a portion of the Social Security benefits that higher-income beneficiaries receive. Nevertheless, annual trust fund income which includes the interest earnings the trust funds receive on the Treasury bonds they hold, as well as the income from tax revenue will continue to exceed benefit payments for a number of years after 2014. Social Security will continue to pay full benefits during this period.
- The second key date is the year in which the combination of annual tax revenues and interest earnings will no longer be sufficient to cover all benefit costs, and the trustees will have to begin redeeming Treasury bonds they hold to raise the additional funds needed to pay full benefits. The trustees' report projects this will occur in 2022. During the years between 2022 and the third key date, Social Security will continue to pay full benefits, because the combination of tax revenues, interest earnings, and income from redeeming Treasury bonds will be sufficient to do so.
- The third key date is the year in which the Social Security surpluses now building up will be exhausted. After that, the only income to the trust funds will be from payroll tax revenue and funds from the partial taxation of benefits, and annual revenues will not be sufficient to pay full benefits. The trustees project this year to be 2034.
There has been confusion and misunderstanding about the third key date. It sometimes is portrayed as the date on which Social Security runs out of money. Many Americans mistakenly think this means there will be no benefits for them after 2034.
This is not the case. As the trustees have said, Social Security will not be out of money when the trust fund surplus is exhausted in 2034. The trust funds will continue after that to receive large sums from payroll tax collections. The problem is that, according to the trustees' calculations, the incoming revenues after that date will be sufficient to cover about 70 percent of benefit payments, rather than 100 percent. That is what is meant when the term "insolvency" is used to describe the condition of the trust funds after the third key date.
That the revenues will be sufficient to defray about 70 percent rather than 100 percent of benefit costs signals the need for action to restore long-term actuarial balance to the Social Security system. But the widespread belief that revenues will cover zero percent of benefits after 2034 is incorrect. Moreover, data in the new report show that the percentage of benefits which Social Security revenues will be able to cover will remain fairly level after 2034, declining a few percentage points over subsequent decades.
The trustees' report also contains one other key number related to Social Security's long-term imbalance the size of the projected shortfall in Social Security over the next 75 years. The new report places the amount of the shortfall that is, the amount by which trust fund income and revenues over the next 75 years will fall short of what is needed to pay full benefits over that period at 2.07 percent of taxable payroll over the 75-year-period.
The key dates and the long-term deficit show an improvement over the trustees' 1997 and 1998 reports, which the trustees attribute to better actual and expected economic performance. As indicated in the Table on page 3, the long-term deficit in Social Security has declined from 2.23 percent of taxable payroll in the trustees' 1997 report and 2.19 percent in the 1998 report to 2.07 percent in the new report. The date by which the trust funds are projected to be exhausted has moved back from 2029, as forecast in 1997, to 2032 as projected last year and to 2034 in the new report.
Trustees' Projections are Conservative
The trustees' reports regularly provide three sets of projections due to the uncertainty of making estimates over a period as long as 75 years. One set of projections incorporates fairly optimistic economic and demographic assumptions. A second set is based on pessimistic assumptions. The third set consists of intermediate estimates, regarded by the trustees as the "best estimates." The dates referred to above are the best estimates (i.e., the intermediate assumptions).
The trustees' intermediate estimates are conservative. These estimates assume that growth in the national economy, as measured by change in the real gross domestic product, will average 1.5 percent per year over the next 75 years. This rate is about half the average rate of growth over the past 75 years. Given the projected decline in the rate of growth of the labor force in the future, the trustees' estimate of future economic growth is understandably cautious. Should this cautious projection prove too conservative, as could be the case, the long-term financial status of Social Security could be better than the trustees project.
Social Security Surplus Has Not Evaporated Due to
Excess Spending in the Rest of the Budget
Polling data indicate that much of the general public mistakenly believes Social Security will not be able to pay full benefits until 2032 and will be able to pay few or no benefits after that date. The polling data indicate that one reason many Americans hold such views is the widespread belief that the government has squandered the Social Security surplus by spending it on other items, and that the surplus consequently will not be available for benefits when needed. This perception is not correct.
The surplus revenues that the Social Security trust funds receive each year (i.e., the amounts by which the trust funds' income in a year exceeds the amount needed to pay Social Security benefits and administrative costs in that year) are provided to the U.S. Treasury. In return, the Treasury provides the trust funds with Treasury bonds backed by the full faith and credit of the U.S. government. These bonds are assets that private investment fund managers regard as the safest and most secure investments they can make. When financial markets become volatile, many private investors shift assets into Treasury securities to avert losses.
1999 Report Long Term Deficit
Year Costs Exceed Tax Revenue
Year Costs Exceed Tax Revenue and Interest
Year In Which Social Security Surplus is Exhausted
Under current law, once these surplus revenues are provided to the Treasury, they may be used to help fund other government operations. This is a practice that has been followed for many years. This practice has not reduced the assets of the Social Security trust funds. Once the trust funds use their surplus revenues to purchase Treasury bonds, what the Treasury does with these revenues does not directly affect the trust funds' assets. The trust funds receive the same amount of Treasury bonds whether the Treasury then uses these revenues to fund a program, finance a tax cut, or pay down the debt.
To be sure, if the Treasury uses these revenues to pay down debt rather than to expand programs or institute tax cuts, that should add to national saving. If such a policy is maintained over many years, it should result in a modestly larger economy that will generate increased payroll tax revenue for the trust funds in future decades. But the notion that the trust funds have been raided and this is why Social Security faces long-term financial difficulties is incorrect. Social Security faces a long-term problem for demographic and economic reasons, not because the trust funds have somehow been looted.
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