Analysis of 2008 Annual Report of the Social Security Trustees

The Social Security Act created a Board of Trustees to oversee the Old-Age and Survivors Insurance and Disability Insurance Trust Funds (OASDI), popularly known as the Social Security Trust Funds. Each year the Trustees 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 $102,000 in 2008 . The cap rises every year with inflation. It 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. When an excess of annual income over expenditures results in an accumulation of assets, those assets earn interest and further increase the Funds. These accumulated assets are commonly referred to as the Social Security “surplus.”

According to the 2008 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 2007, nearly 50 million people were receiving benefits: 34 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 163 million workers had earnings covered by Social Security and paid payroll taxes. Total benefits paid in 2007 were $585 billion. Income was $785 billion, and assets held in special issue U.S. Treasury securities grew to $2.2 trillion.

The long-range financial outlook for Social Security improved slightly from the 2007 Trustees Report.

• The projected Social Security actuarial deficit ¹ – measured as a percent of taxable payroll over the 75-year period – decreased from 1.95 percent of taxable payroll in last year's report, to 1.70 percent of payroll. ²

• As in last year's report, the Social Security Trust Funds are projected to be solvent (and can therefore pay 100% of benefits) through the year 2041.

• The open group ³unfunded obligation ⁴ for the program over the 75-year period (from 2008 to 2082 for this report) is projected to be $ 4.3 trillion in present value, down from $4.7 trillion in last year's report .

• The unfunded obligation over the “infinite horizon” remains the same as in 2007 at $13.6 trillion in present value terms.

Income exceeded expenditures and the surplus continued to grow.

• Total income to OASDI in 2007 was $785 billion and total expenditures (benefits and other expenses) were $ 594 billion , for a surplus of $190 billion .

• Total assets held in Social Security's special issue U.S. Treasury securities at the end of 2007 totaled $ 2.2 trillion , or 370 percent of expected annual expenditures for 2007.

Social Security remains strong for many years.  

• Total assets are expected to reach $ 4.3 trillion by 2017, or 385 percent of annual expenditures in that year.

• Projected OASDI tax income will begin to fall short of outlays in 2017, but interest and assets remain sufficient to finance 100 percent of scheduled annual benefits until 2041. Thereafter, income will be sufficient to finance 78 percent of scheduled benefits.

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

• The annual cost of Social Security benefits as a share of GDP is estimated at 4.3 percent in 2007, and projected to increase to 6.1 percent of GDP in 2035, and then decline to 5.8 percent of GDP in 2048 and remain at that level. The projection of the long-range cost in the out years has declined from the 2007 report.

• Annual tax revenue flowing into Social Security as a share of U.S. economic output, or Gross Domestic Product (GDP), is projected to be 4.9 percent in 2008 and then decrease to 4.4 percent in 2082.

Social Security's costs are expected to grow as a share of GDP over the trustee's valuation period for three reasons: workers born between 1946 and 1964 (the baby boom generation) will begin reaching retirement age in large numbers beginning in 2011; people are living longer after age 65; and birthrates in the future are assumed to remain low.

Social Security's income is projected to decline as a share of GDP over the valuation period, on the other hand, because the Trustees project workers' wages that are subject to Social security taxes will continue to grow more slowly than other types of income. Wages that are subject to Social Security taxes equal 38.1 percent of GDP in 2007 and decline to 33.3 percent in 2082 . Key sources of income that are not taxed to pay for Social Security include: the increasing share of workers' wages that fall above the tax cap ( $102,000 in 2008 ); employers' contributions to employee benefits such as health insurance premiums, pensions and 401(k) plans; and other non-wage income such as interest, dividends, capital gains, and rental income.

Issues to Consider

Social Security benefits, while critical to retirees, are not overly generous. Social Security continues to be America 's most important retirement income program. Social Security is the main source of income for two out of three beneficiaries age 65 and older. For one in five beneficiaries, Social Security is their only income. The average monthly benefit for a retired worker this year is $1,081 – about $13,000 a year.

Social Security's Long-Range Financing Has Improved. This year's Trustees' report shows an improvement in the long-range outlook for Social Security. The long-range deficit has dropped from 1.95 percent of payroll to 1.70 percent of payroll over the 75-year projection period. The chief reason for this improvement is a change in the actuaries' methodology based on updated data from experts on immigration. This year the actuaries took into consideration the demographics of immigrants other than legal permanent residents. As a result, they factored into their calculations a larger number of young people of working age in this population, resulting in an increase in payroll tax contributions to the trust funds. Based on expert evidence, the actuaries also reduced their assumptions about the rate of collection of benefits among older workers in this population.

The Sky Will Not Fall in 2017. As in last year's report, the Social Security Trustees have projected that 2017 will be the year in which Social Security outlays will exceed incoming tax revenue. Many commentators have used this data to argue that Social Security will face an immediate cash flow crisis in 2017, placing enormous budgetary pressure on the rest of government. In fact, according to the report, the excess of costs over income in 2017 is only $18.6 billion in constant 2008 dollars.

Moreover, the Congressional Budget Office baseline budget for Fiscal Year 2009 forecasts an even more positive picture. CBO projects Social Security will continue to have cash-flow surpluses throughout the 10-year budget window, including FY 2017 and FY 2018. In addition, CBO projects overall federal budget surpluses beginning in FY 2012 and growing throughout the period.

Misleading Measure Exaggerates the Size of the Problem. In announcing the 2008 Report of the Social Security and Medicare Trustees, Secretary of the Treasury Henry M. Paulson again cited the exaggerated “infinite horizon” measure of Social Security solvency. The implication is that Social Security will need $13.6 trillion in funds in order to finance benefits in the foreseeable future. This is a highly misleading measure. Traditionally, Social Security's long-range solvency has been determined over a 75-year period. In recent years, the Social Security actuaries have been asked to produce a figure representing Social Security's so-called “permanent” or “infinite” unfunded liability. Projections of Social Security's unfunded liability over an infinite horizon should not replace the traditional 75-year estimates as the primary projections upon which policymakers and analysts rely. There is too much uncertainty in long-term financial estimates to justify relying on projections covering an infinite time period. The new “infinite horizon” concept simply serves to institutionalize a case for dismantling Social Security. In a letter to the Social Security Trustees in December 2003, the American Academy of Actuaries, the leading professional organization of actuaries, warned that infinite-horizon projections “provide little if any useful information about the program's long-term finances and indeed are likely to mislead anyone lacking technical expertise.”

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

²This 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 14.1 percent. Alternatively, changes could be made equivalent to reducing all current and future benefits by about 12 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, April 2008