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Analysis of the 2012 Social Security Trustees' Report

Highlights of the 2012 Report

Throughout our nation's recent recession and the prolonged recovery that has followed, Social Security has demonstrated its strength by paying benefits to those who are entitled to them and functioning as the program was intended to function. Still, we see in the 2012 Report of the Social Security Trustees signs of the recession's effect. But there's still some good news for working Americans and for seniors in the Trustees' new report.

Here are some of the highlights:

•  Social Security remains strong, despite the lingering effects of the recession, and will be able to pay full benefits for decades to come - until 2033. Thereafter, there will still be enough revenue coming into the program to pay 75 percent of all benefits owed.

•  Social Security remains well-funded. With the economy showing slow signs of recovery, the Trustees estimate that, in 2012, Social Security's total income will exceed its expenses by over $57 billion. In fact, the Trustees estimate that total annual income is expected to exceed program obligations until 2020.

•  The Trustees report there is now nearly $2.7 trillion in the Social Security Trust Fund, which is $69 billion more than last year, and that it will continue to grow. Payroll contributions and interest on the Trust Fund's assets will fully cover benefits for decades to come.

The following provides more information about the 2012 report.

Background

The Social Security Act established 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 over the upcoming 75 years. The 2012 report is the 72 nd report that has been prepared by the Trustees since the beginning of the program. 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 that is projected to be earned over the 75-year valuation period. The 2012 report finds that the combined OASDI Trust Fund has an actuarial deficit equal to 2.67 percent of payroll.

As the actuarial deficit shows, the Social Security program is not in perfect financial health. It is important to keep in mind that the Trust Fund solvency date for Social Security has seen fluctuations many times in recent decades, from a depletion date as distant as 2048 in the 1988 report to as soon as 2029 in the 1994 and 1997 reports. Despite the crisis myths perpetuated by fiscal conservatives and some in the media, the National Committee believes that Congress can improve the long-term outlook for Social Security with modest and manageable changes in revenue without enacting harmful cuts for current or future retirees. Recent polling has shown that a majority of Americans support lifting the payroll tax cap to ensure Americans contribute to Social Security at higher income levels.

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 1, up to a wage cap of $110,100 in 2012 that 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. 2They are then allowed to deduct the equivalent of the employer's share from their income taxes.

In addition to payroll tax contributions, Social Security receives a small amount of revenue from income taxes on Social Security benefits paid by retirees with higher incomes. It is also credited with interest from its Treasury bond holdings.

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 2012 Trustees' Report, income from Social Security payroll taxes accounted for about 70 percent of Trust Fund income in 2011 while transfers from the general fund comprised 13 percent. Income taxes paid on Social Security benefits represented 3 percent, and interest on reserves made up the remaining 14 percent.

At the end of 2011, nearly 56 million people were receiving benefits: 38.5 million retired workers and their dependents, 6.3 million survivors of deceased workers, and 10.6 million disabled workers and their dependents. 158 million workers had earnings covered by Social Security and paid payroll taxes.

Social Security's Long-Range Outlook

The Trustees project that the Social Security Trust Funds will be able to pay full benefits until the year 2033. Thereafter, Social Security will have sufficient annual revenue to pay about 75 percent of benefits. Last year's Trustees' Report predicted that Social Security would be able to pay full benefits until 2036 and pay 77 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 2.67 percent of taxable payroll, compared with last year's estimate of 2.22 percent.

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 5.0 percent to about 6.4 percent in 2035, and then decline to 6.1 percent of GDP by 2055 and remains between 6.0 and 6.1 percent through 2086.

Seen from this perspective, the projected growth of Social Security is relatively flat and can be managed through modest changes to the program.

The Importance of the Trust Funds

The Trust Funds, and the interest earned by the assets they hold, forms a vitally important element of Social Security's financing. Although it is fashionable for some to dismiss the importance of the Social Security Trust Funds and to discount the income produced by their assets, the trust funds are an essential element of the program's funding. And it's important to emphasize that the Trust Funds did not accumulate the huge sums they now hold by accident.

Throughout most of the history of the program, the Trust Funds played only a minor role in the funding of the program. That's because for many years the balances they held were relatively small and were used only as a contingency reserve to tide the program over in years when revenue temporarily fell below the level needed to pay benefits.

That changed when Social Security was reformed in 1983. At that time Congress made the decision, in essence, to pre-fund the retirement of the baby boomers by accumulating a very substantial balance in the Trust Funds. As the present balance of nearly $2.7 trillion testifies, the Congress was successful in that regard.

Some question whether this plan will work. There are economists who argue that the balances in the Trust Funds, and the interest they earn, are not economically meaningful. Others question how the bonds would be redeemed when the money is needed to pay benefits. Still others argue that the program has to be cut to make sure that the Trust Funds' assets never have to be drawn down.

We believe that the important thing to remember about the Trust Funds is that they hold bonds that were purchased with money that was paid into the program by millions of Americans. Those who have made these contributions are well aware of the amounts that have been deducted from their weekly paychecks, and they expect the assets to be honored.

They have the law on their side in that regard. Section 201(d) of the Social Security Act says that "Each obligation issued for purchase by the Trust Funds shall be evidenced by a bond, note, or certificate of indebtedness setting forth the principal amount, date of maturity, and interest rate of the obligation and stating on its face that the obligation shall be supported by the full faith and credit of the United States, and that the United States is pledged to the payment of the obligation with respect to both principal and interest."

Clearly, it is important that action be taken to strengthen the financial soundness of the Social Security program, so that it remains available to all Americans, both now and in the future. There are many different options for strengthening this vital program, and developing a consensus remains a challenge that must be met by the nation's leaders. But because of the decision made in 1983 to build up a significant balance in the Trust Funds, we have time to develop that consensus. We don't need to try to fix the long-term funding gap in these challenging economic times, and we don't need to mix reforming Social Security with balancing the budget.

National Committee's Concerns

Although seniors received a modest 3.6 percent Cost-of-Living Adjustment (COLA) in 2011, it was the first such increase in two years. More troublesome, the 2012 Trustees Report estimates that next year's COLA will be a disturbingly small 1.8 percent. These developments leave the National Committee convinced that Social Security's 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 beneficiaries see the change in their January Social Security payment.

Senior citizens continue to be harmed by the lack of a Social Security COLA for 2009 and 2010. Seniors spend a significant portion of their income on out-of-pocket health care 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, 44 percent of the average senior's Social Security check will be consumed by Medicare out-of-pocket costs by 2086 compared with 24 percent today.

Seniors can't afford to lose their Social Security COLA. And they can't afford to have their COLA calculated using an index that does not accurately gauge the spending patterns that are unique to them. That's why the National Committee supports legislation that would base the Social Security COLA on a consumer price index that better reflects the purchasing patterns of seniors. This kind of specialized index should be used to make sure that seniors' buying power does not erode over time.

We need Social Security more than ever. Current economic conditions have had a devastating effect on the retirement savings of millions of Americans. Retirement savings accounts have declined substantially, and housing values have continued to decline. In the face of these economic hard times, Social Security has functioned exactly as it is intended to do. That's because 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 .

The challenge for our generation is to insure that Social Security is strengthened and protected so that it remains strong now and into the future.

 

1 For 2011 and 2012, the Congress enacted a Payroll Tax Holiday, which reduced the amount of the payroll contributions for workers from 6.2 % to 4.2 % of wages earned, while the contribution rate for self-employed persons was similarly reduced. The resulting shortfall in revenue to the Social Security trust funds, $103 billion for 2011 and an estimated $112 billion in 2012, will be made up by the transfer of an equal amount from the government's general fund to the Social Security trust funds

2 See footnote 1.



Government Relations and Policy, April 2012



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