April 1, 2005

TRUSTEES' REPORT SHOWS LITTLE OVERALL CHANGE IN SOCIAL SECURITY'S FINANCES

Key Dates and Figures in Trustees’ Report
2017 Year in which benefit payments begin to exceed Social Security tax revenues; program starts using interest on its trust fund bonds to pay benefits.
2027 Year in which balances in trust fund peak; program starts redeeming bonds in trust fund to raise additional funds needed to pay full benefits.
2041 Year in which trust fund is exhausted.  Payroll tax revenue will still be sufficient to pay 74 percent of benefits, falling gradually to 68 percent of benefits in 2079.
0.65% Size of Social Security shortfall through 2079 as a share of GDP.  (CBPP estimates tax cuts will cost 2% of GDP through 2079.)

The latest report by the Social Security trustees is slightly more pessimistic than last year’s report about the program’s finances over the next two decades, and slightly more optimistic about the program’s longer-term outlook.  On balance, the report shows little overall change from last year.

  • Social Security can pay 100 percent of promised benefits until 2041.  The trustees predict that the Social Security trust fund will keep growing until 2027.  At that point it will start to shrink, as the program begins redeeming the bonds it contains to raise the funds needed to pay full benefits.  As of 2041, the trust fund will be exhausted and Social Security will no longer be able to pay full benefits.  This projection is slightly more pessimistic than last year’s, which predicted that the trust fund would be exhausted in 2042.
  • After 2041, Social Security can pay 74 percent of promised benefits.  After the trust fund is exhausted, Social Security will continue to collect sufficient payroll taxes to pay 74 percent of promised benefits.  This projection is slightly more optimistic than last year’s, which predicted that payroll tax revenues would be sufficient to pay 73 percent of promised benefits.
  • The President’s private-accounts proposal would cause the trust fund to become exhausted about 11 years sooner, unless it is coupled with large benefit reductions.  Shifting large amounts of revenue out of Social Security and into private accounts, as the President has proposed, would not help to close the Social Security shortfall and could make the challenge greater.  In the absence of any cuts in Social Security benefits, the President’s private accounts would cause the trust fund to become insolvent 11 years earlier, in 2030 rather than 2041.
  • Over the long term, Social Security’s shortfall is only a fraction of the cost of the Administration’s tax cuts if they are extended.  According to the trustees’ report, Social Security faces a deficit of 0.65 percent of GDP through 2079.  (The Congressional Budget Office estimates the shortfall at 0.36 percent of GDP.)  In contrast, the tax cuts enacted since 2001 are projected to cost 2 percent of GDP through 2079.*

    Thus, the tax cuts would cost three times as much over the long term as the trustees’ estimate of the Social Security shortfall, and more than five times as much over the long term as CBO’s estimate of the Social Security shortfall.

In 1983, Congress and President Reagan acted on recommendations made by the Greenspan Commission and strengthened Social Security’s financial status through a combination of benefit and revenue measures.  Various combinations of modest benefit reductions and revenue increases have now been proposed by economists Peter Diamond and Peter Orszag, former Social Security Commissioner Robert Ball, and AARP.  Such steps could restore Social Security solvency while beginning to reduce federal deficits and debt immediately, rather than entailing substantial new borrowing and additional debt.


End Note:

* The standard assumption used by CBO, GAO, and other organizations is that the cost of a tax cut remains roughly constant as a share of GDP once it is fully in effect.  CBO projects that if the tax cuts enacted since 2001 are extended through 2015, their cost in 2015 will be 2 percent of GDP; we assumed that this cost will remain constant through 2079, which appears to be a conservative assumption.