The Social Security Act created a Board of Trustees to oversee the Old-Age, Survivors and Disability Insurance Trust Funds (OASDI), popularly known as the Social Security Trust Funds. Each year the Trustees issue a report on the financial status of the Trust Funds. The report is a snapshot of the health of the funds in the short range (10 years) and in the long range (75 years). With the help of the Social Security Administration actuaries, the Trustees estimate the income and expenditures of the Funds, taking into account projections of both demographic and economic factors.
The Social Security Trust Funds are considered to be in long-range balance when the income to the Funds exceeds expenditures over 75 years. When income does not meet expenditures in the long run, there is a shortfall, or deficit. Income, expenditures and balances are expressed in both dollars and as a "percent of payroll," meaning the percent of all wages or self-employment income subject to taxation.
Sources of Funding for Social Security
Social Security is financed mainly through payroll taxes on wages and self-employment income. Employees and employers each make contributions equal to 6.2 percent of wages, up to a wage cap of $106,800 in 2010 that ordinarily increases with the growth in the nationwide average wage. The wage cap was originally set at an amount that would tax about 90 percent of all wage income in the United States . However, wages at the high end of the income scale have risen faster than average paychecks in recent years, so today the cap only covers about 83 percent of wages.
The self-employed contribute the equivalent of the combined employer and employee tax rates, which is 12.4 percent. They are then allowed to deduct the equivalent of the employer's share from their income taxes. Social Security also receives a small amount of revenue from income taxes on Social Security benefits paid by retirees with higher incomes.
The Social Security Trust Funds
When working Americans pay their Social Security payroll taxes to the U.S. Treasury, those taxes are credited to the Social Security Trust Funds. These funds are used to pay Social Security benefits. If income to the Trust Funds exceeds the amount of benefits that the program is obligated to pay, then the Social Security Trust Funds are credited with the excess income. The income is used to purchase special issue U.S. government bonds that are backed by the full faith and credit of the United States and which earn a rate of return similar to that earned by other long-term U.S. securities. These bonds are the assets of the Trust Funds. They earn interest and further increase the balance of the funds. These accumulated assets are commonly referred to as the Social Security "surplus" or "reserves."
According to the 2010 Trustees' Report, income from Social Security payroll taxes accounted for about 83 percent of Trust Fund income in 2009, income taxes paid on Social Security benefits represented 3 percent, and interest on reserves made up the remaining 14 percent.
At the end of 2009, nearly 53 million people were receiving benefits: 36 million retired workers and their dependents, 6 million survivors of deceased workers, and 10 million disabled workers and their dependents. 156 million workers had earnings covered by Social Security and paid payroll taxes.
Social Security's Long-Range Outlook Remains Strong
The Trustees project that the combined Old-Age, Survivors and Disability (OASDI) Trust Funds will be able to pay benefits until the year 2037. Thereafter, Social Security will have sufficient annual revenue to pay about 78 percent of benefits. Last year's Trustees' Report also predicted that Social would be able to pay full benefits until 2037, but pay only 75 percent of benefits thereafter.
The projected actuarial deficit of the Social Security program, measured as a percent of taxable payroll over the 75-year projection period is 1.92 percent of taxable payroll, 0.08 percentage point smaller than last year's estimate.
At the same time, Social Security's accumulated assets continue to grow. For 2010, Social Security's reserves are projected to rise to $2.6 trillion by the end of the year and reach $3.8 trillion by 2019.
Social Security Relative to Gross Domestic Product
Another important way to look at Social Security's future is to view its annual cost and tax income as a share of U.S. economic output, or Gross Domestic Product (GDP). Social Security's cost as a percentage of GDP is projected by the Trustees to rise from the current level of 4.8 percent to about 6.1 percent in 2035, and then decline to 5.9 percent of GDP for the period 2050 through 2084.
Seen from this perspective the projected growth of the program is modest and can be managed through relatively modest changes to the program.
Effect of the Recession on the Program
The recession has had only a modest impact on the long-range solvency of Social Security. That is because the length of the downturn will be relatively short when compared to the long-range 75 year projection period for Social Security. In general, the Social Security Trustees already take into account the impact of economic cycles when making their long-term projections.
Year-to-year fluctuations in the long-range date for insolvency are to be expected, and this year's projection is well within the range of recent estimates. In the 1990s, the date on which the Trust Funds were expected to be unable to pay full benefits hovered around 2030. In this decade, the projected date has been between 2037 and 2042. In fact, the Trustees projected in the year 2000 that the Trust Funds would be unable to pay full benefits in 2037. This demonstrates that assumptions about demographics and the economy can change, but that the current estimate does not differ significantly from recent previous estimates.
The Change in Short-Term Projections for Social Security is a Fiscal Problem, not a Social Security Problem
The report of the Trustees confirms that the recession has not placed a significant strain on the Trust Fund. Not surprisingly, given the high rate of unemployment that the country is experiencing, the report projects some fall-off in the revenue received by the Trust Funds. Some conservative analysts and policymakers have tried to make it seem as though the modest decline in revenue means that the Trust Funds' assets would be depleted over the next year or two. This is not the case. In fact, the Social Security program has functioned throughout the recession as it was intended to function. Benefits have been paid to everyone entitled to them, with no delay and no reduction.
Social Security’s surplus is not disappearing. While it is true that revenue income received by the Trust Funds has declined during the recession, the program’s financial health is still sound. In fact, as we stated earlier, the surplus held by the Trust Funds is still growing, and is projected by the Social Security actuaries to reach a peak in 2020 of $3.1 trillion.
These surpluses and the interest income they yield, along with continuing payroll taxes and other receipts to the Trust Funds, are sufficient to assure payment of all benefits through 2037. However, it is also true that, at least for the time being, Social Security’s Trust Funds are not able to loan money to the general government and will loan less in future years than was previously projected.
Don't confuse one kind of surplus with another. Whether intentionally or unintentionally, those who assert that the "surplus in Social Security is disappearing" are misleading the American public. In fact, Social Security has two types of surpluses: the "annual surplus" and the "total assets" (sometimes also known as the "surplus"). An "annual surplus" occurs in any year in which the revenue to Social Security that year exceeds the outgo for the year. As those annual surpluses accumulate over time, they become the "total assets" of the Social Security Trust Fund. Because many people refer to those accumulated assets as Social Security's surplus, they may incorrectly conclude that the reduction in projected annual surpluses over the next few years means that all of the assets in the Trust Fund, which equal over $2.5 trillion, will disappear in the short term and that Social Security will soon be unable to pay benefits. The truth is that, even after taking into account the impact of the recession, the assets held by the Trust Fund will continue to permit payment of full benefits until 2037.
National Committee's Concerns
Social Security's Cost-of-Living Adjustment (COLA) needs to be fixed. Under current law, a Social Security beneficiary receives an increase in his or her Social Security check each year based on the previous years increase in the cost-of-living. This COLA is intended to offset the individual's additional expenses resulting from inflation. The Social Security COLA is measured based on the increase in the cost of a market basket of goods and services from the third quarter of one year to the third quarter of the next year. The size of the COLA is announced by the Social Security Administration, usually in October, and the beneficiary sees the change in his or her January Social Security check.
The 2010 Social Security Trustees' Report projects that, for the second year in a row, seniors will not receive a COLA in 2011, and only a very modest 1.2 percent COLA for 2012. The projection of a second zero COLA reflects the low inflation that is a byproduct of the long recession and accompanying high rates of unemployment. Fortunately, the Social Security statute prevents the COLA from falling below zero, thus preserving most beneficiaries' checks at the previous year's level. However, senior citizens will be significantly harmed by the lack of a Social Security COLA over the next several years because their health care costs are rising dramatically. Seniors spend a significant portion of their income on out-of-pocket expenses not covered by Medicare. As time goes by, more and more of their Social Security benefit checks will be eaten up by rising health care costs. According to the Medicare Trustees, 50 percent of the average senior's Social Security check will be consumed by Medicare out-of-pocket costs by 2080 compared with 27 percent today. Seniors can't afford to lose their Social Security COLA. The National Committee supports legislation to provide a $250 payment to seniors who are not receiving a Social Security COLA.
We need Social Security more than ever. Current economic conditions have had a devastating effect on the retirement savings of millions of Americans, leaving them with significant reductions in their 401(k)s and other retirement vehicles. At the same time, housing values have dropped dramatically. Social Security was created in times much like today to provide Americans with a foundation of security they could count on in uncertain economic times. Social Security smoothes the risks of these economic cycles over large groups of people and long periods of time, and it remains the most secure retirement income in America.
Government Relations and Policy, August 2010