Analysis of 2009 Annual Report of the Social Security Trustees

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 Fund, 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.

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 2009 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.

When working Americans pay their Social Security payroll taxes to the U.S. Treasury, those taxes are credited to the Social Security Trust Funds. Some of those taxes are paid out monthly in Social Security benefits. If income to the Trust Funds exceeds the value of benefits paid, 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 . The bonds earn a rate of return similar to that earned by other long-term U.S. securities. An excess of annual income over expenditures results in an annual surplus. The accumulated annual surpluses become the total assets of the Trust Funds. Those assets earn interest and further increase the funds. These accumulated assets are commonly referred to as the Social Security "surplus" or "reserves."

According to the 2009 Trustees' report, income from Social Security payroll taxes will account for about 83 percent of Trust Fund income in 2008; income taxes paid on Social Security benefits will represent 2 percent, and interest on reserves will make up the remaining 14 percent.

At the end of 2008, nearly 51 million people were receiving benefits: 35 million retired workers and their dependents, 6 million survivors of deceased workers, and 9 million disabled workers and their dependents. During the last year an estimated 162 million workers had earnings covered by Social Security and paid payroll taxes.

The long-range financial outlook for Social Security changed slightly from the 2008 Trustees' Report, but remained strong.

• The projected Social Security actuarial deficit ¹ - measured as a percent of taxable payroll over the 75-year period- is 2.00 percent of taxable payroll, only 0.30 percentage points larger than last year's estimate. ²

• The Social Security Trust Funds are projected to be solvent (and can therefore pay 100 percent of benefits) through the year 2037. Thereafter, the Trust Funds will be able to pay 76 percent of benefits.

• The open group ³unfunded obligation ⁴ for the program over the 75-year period (from 2009 to 2083 for this report) is projected to be $5.3 trillion in present value.

Income exceeds expenditures and the surplus continues to grow.

• Total income to OASDI in 2009 is projected to be $819 billion, and total expenditures are projected to be $683 billion, for an annual surplus of $137 billion.

• Total assets for 2009 are projected to be nearly $2.6 trillion, or 354 percent of annual expenditures for that year.

Social Security remains strong for many years.  

• Total assets are expected to reach $3.9 trillion by 2018, or 338 percent of annual expenditures in that year. In last year's report, assets were projected to reach 378 percent by 2018.

• Projected OASDI income, not including interest, will begin to fall short of outlays in 2016, but interest and assets remain sufficient to finance full benefits until 2037. Thereafter, income will be sufficient to finance 76 percent of benefits.

As the baby boom generation ages, Social Security expenditures grow as a proportion of the economy, but remain quite manageable.  

• 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 to grow from 4.8 percent in 2009 to 6.2 percent in 2034, and then decline to 5.8 percent of GDP for the period 2050 through 2083.  

MAJOR ISSUES

Social Security's Long-Range Financial Outlook Remains Strong

The Trustees project that the combined Old-Age, Survivor, and Disability (OASDI) Trust Fund will be able to pay full benefits until the year 2037. 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 2041 and 78 percent of benefits thereafter.

Social Security's accumulated assets continue to grow. For 2009, Social Security's reserves are projected to rise to $2.6 trillion.

The recession has had only a modest impact on the long-range solvency of Social Security. That is because the length of the downturn is 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. However, this year the Trustees have projected slightly lower growth in the Gross Domestic Product (GDP) after the economy recovers. The chief reasons for the change from 2041 to 2037 are the lower GDP growth and an assumed faster reduction in the mortality rate.

Year-to-year fluctuation in the long-range date for insolvency is expected and this year's projection is well within the range of estimates for the last decade. In the 1990s, the date on which the Trust Fund was 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 Fund would be unable to pay full benefits in 2037. This demonstrates that assumptions about demographics and the economy can alter projections significantly, but that the current estimate does not differ significantly from estimates over the last decade.

The Change is 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 Social Security Trust Fund, as some assert. Some conservative analysts and policymakers have tried to make it appear as though the recession has slashed the surplus. One observer argued that Social Security's surplus would nearly disappear by next year.

Social Security's surplus is not disappearing. Due in part to the economic downturn, the 2009 report projects smaller short-term annual surpluses in the Old-Age, Survivors and Disability (OASDI) Trust Fund when compared to the short-term annual surplus projected in last year's report. This means that the Social Security Trust Fund will not be loaning as much money to the general government as had been projected prior to the recession, but it does not reduce the Trust Fund's ability to finance benefits.

Under the 2009 Trustees' projections, the general government will be able to borrow from Social Security $76 billion less this year and $87 billion less in 2010 than was projected in last year's report.  The 2009 Trustees' report projects that the short-term OASDI “annual surpluses” will be lower than projected in last year's report. In this year's report, the Trustees projected an annual surplus of $137 billion for the year 2009 and $138 billion for 2010. Last year, prior to the economic downturn, the Trustees had projected a somewhat larger annual surplus of $213 billion for 2009 and $225 billion for 2010.

The above figures include all income and outgo of the OASDI Trust Fund. Some fiscal analysts fail to count as income the interest on the securities held by the Trust Fund, arguing that it is an intergovernmental transfer. While the source of that income may be general government funds, that interest is owed by statute to the Trust Fund.

While the Trustee's report shows that annual cash flow, excluding interest, to the Social Security Trust Fund will go negative in 2016 instead of 2017, the Trust Fund will continue to pay full benefits from continuing payroll taxes and other receipts to the Trust Fund, including interest owed on the assets held by the Trust Fund.

According to the new projections, Social Security will be able to continue paying benefits with income, including interest, until 2024. After 2024, the federal government will have to start repaying the loans that the Social Security Trust Fund has made to the general fund. Revenue to Social Security from the payroll tax and other receipts, including the repayment to the Trust Fund of the loans made to the general government, will finance full benefits through 2037.

Key Dates for the OASDI Trust Funds

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 Social Security's total-assets surplus, which is $2.6 trillion in 2009, is disappearing 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.

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 .

Social Security Cost-of-Living Adjustment (COLA) Needs to be Fixed

The Social Security Trustees' report for 2009 projects that there will be no COLA increases to Social Security checks in 2010 or 2011.

The projection of a zero COLA is the unexpected result of an interaction between current law and last year's dramatic rise in oil prices. While this situation is not the result of any action by Congress, the President or his Administration, Congress can act to alter the law to give COLA increases for the next two years. 

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.

For most the last decade, the Social Security COLA has remained in the 2 to 3 percent range. However, due to a significant rise in energy prices in the summer and fall of 2008, the adjustment for January 2009 was 5.8 percent.

Due to the drop in oil prices in late 2008 and the economic downturn triggered by mortgage crisis, the Social Security Trustees and many other economic analysts are projecting lower, even negative, inflation for the near term. Fortunately, the Social Security statute prevents the COLA from falling below zero, thus preserving the beneficiaries check at the previous year's level. Unfortunately, the elderly experience higher inflation than other Americans due to the significantly larger share of their expenses that is spent on health care.

The National Committee Wants to See Congress Take Action on the COLA

The National Committee believes that senior citizens will be significantly harmed by the lack of a Social Security COLA over the next two years. That is because health care costs for seniors 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 the Medicare Trustees, 67 percent of the average senior's Social Security check will be consumed by Medicare out-of-pocket costs by 2080. Seniors can't afford to lose their Social Security COLA.

In addition, under current law, a beneficiary is protected or held harmless from having his or her Part B premiums rise in an amount greater than the amount of the Social Security COLA. This is to prevent premium increases for Part B from reducing the beneficiary's current Social Security check. If Social Security COLAs are not paid in 2010, the vast majority of Social Security beneficiaries will have no increase in their Part B premiums. That offers a useful protection for about three-quarters of existing Social Security beneficiaries but will result in significantly higher premiums for those who are unprotected:  new enrollees, beneficiaries subject to the higher means-tested premiums for Part B, and some low-income seniors whose benefits are provided through the Medicaid program. The 'hold harmless' provision does not apply to premiums for the prescription drug benefit under Part D, which are currently projected to increase on average 11 percent, significantly eroding seniors' ability to keep up with other increases in their out-of-pocket health care costs.   

The National Committee therefore suggests that the Congress legislate a modest COLA for the next several years above the cost of the premium to help seniors keep up with the steadily rising cost of health care.

¹The difference between income and cost of the program expressed as a percentage of taxable payroll over the valuation period 

² This deficit indicates that financial adequacy of the program for the next 75 years could be restored if increases were made equivalent to increasing the Social Security payroll tax immediately and permanently from its current level of 12.4 percent (for employees and employers combined) to 14.4 percent. Alternatively, changes could be made equivalent to reducing all current and future benefits by about 13.3 percent.

³ This includes taxes and costs for past, current and future participants.

⁴ This is the difference between the present values of Social Security inflows and outflows plus the existing Trust Fund.

Government Relations and Policy, May 2009