Analysis of 2011 Annual Report of the Social Security Trustees

Highlights of the 2011 Report

Throughout our nation's recent recession, 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 2011 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 the next 25 years - until 2036.
• Despite the gloom and doom rhetoric of those who want to cut Social Security to balance the budget, the program continues to run an annual surplus. That surplus is projected to be $60 billion in 2011.
• The Trust Funds currently have a surplus of $2.6 trillion. This surplus is projected to grow until 2022. At that time the balance in the trust funds are projected to be $3.7 trillion.

The following provides more information about the 2011 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. 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 are projected to be earned over the 75 year valuation period.

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 $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 ². They 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 2011 Trustees' Report, income from Social Security payroll taxes accounted for about 80 percent of Trust Fund income in 2010. Income taxes paid on Social Security benefits represented 3 percent, and interest on reserves made up the remaining 16 percent.

At the end of 2010, nearly 54 million people were receiving benefits: 37 million retired workers and their dependents, 6 million survivors of deceased workers, and 10 million disabled workers and their dependents. 157 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 full benefits until the year 2036. Thereafter, Social Security will have sufficient annual revenue to pay about 77 percent of benefits. Last year's Trustees' Report predicted that Social Security would be able to pay full benefits until 2037 and pay 78 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 2.22 percent of taxable payroll, 0.30 percentage point larger than last year's estimate.

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 6.2 percent in 2035, and then decline to 6.0 percent of GDP for the period 2050 through 2085.

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

Despite the Effects of the Recession, the Social Security Program Remains Strong

The report of the Trustees confirms that the recession has not placed a significant strain on the Trust Fund. As mentioned earlier, the program is solidly funded and continues to run substantial surpluses. It isn't surprising that, after the prolonged period of unemployment we have experienced and the sub-par performance of the economy that the tax income to Social Security's trust funds would be affected. Some conservative analysts have portrayed this fall-off as being more severe than it is.

Some have asserted that the Trust Funds' assets would be depleted quickly. In fact, the Social Security's trust funds continue to grow, and will continue to do so until they reach their peak projected build-up in 2022. In that year, the balance in the trust funds is projected to equal $3.7 trillion. These assets will assure payment of all benefits to everyone who is entitled to Social Security until 2036. In that year, the trust funds will be depleted, but the program will continue to receive revenue income that will equal about 77 percent of all benefits owed for that year.

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 the 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 $2.6 trillion testifies, the Congress was successful in that regard.

Some question whether this plan will work. There are economists who assert 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 in these challenging economic times, and we don't need to mix reforming Social Security with balancing the budget.

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 beneficiaries see the change in their January Social Security payment.

The 2011 Social Security Trustees' Report projects that seniors will receive only a very modest 0.7 percent COLA for 2012. Although the COLA may end up slightly higher depending on gas prices this summer, this is still a very low adjustment. In fact, the average senior will not see an increase in their benefit because Medicare premium increases will absorb all or most of the increase from the COLA. The fact that the Trustees Report reflects such a low estimate, in the face of the kind of rampant inflation that every senior sees at the grocery store or at the gas station tells us that the method for calculating the COLA needs to be reformed.

Senior citizens have been harmed significantly by the lack of a Social Security COLA for the past two years. 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, 46 percent of the average senior's Social Security check will be consumed by Medicare out-of-pocket costs by 2085 compared with 27 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 for those of our children who depend on it in the future.

¹ For 2011, 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, estimated to be $113 billion, 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, May 2011