V I E W P O I N T

Analysis of the 2005 Annual Report of the Social Security Trustees

Each year the Trustees of the Old-Age and Survivors Insurance and Disability Insurance Trust Funds (OASDI) report on the financial status of the Social Security 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.

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 securities that 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.”

The long-range financial outlook for Social Security remained essentially unchanged from the 2004 Trustees Report.

• The Social Security Trust Funds are solvent (and can therefore pay 100% of benefits) through the year 2041, one year earlier than the previous year's report.
• The Social Security deficit – measured as a percent of taxable payroll over the traditional 75-year period – increased slightly from 1.89 percent of taxable payroll in last year's report, to 1.92 percent of payroll.

Income exceeded expenditures and the surplus continued to grow.

• The sizeable annual tax income surpluses the Trust Funds experienced in recent years continued in 2004, with non-interest (tax) income exceeding outgo in the combined Social Security (OASDI) Trust Funds by $67 billion.
• Total income (including interest) in 2004 was $658 billion and benefits paid were $493 billion, for a surplus (before expenses) of $165 billion. Total assets held in Social Security's special issue U.S. Treasury securities at the end of 2004 totaled $1.7 trillion, or 320 percent of expected annual expenditures for 2005.

Social Security remains strong for many years  

• Assets of the Trust Funds provide a reserve to pay benefits whenever expenditures exceed income. Assets increased by $156 billion in 2004, for a total of $1.7 trillion, or 320 percent of estimated expenditures for 2005.
• Total assets are expected to reach $3.7 trillion by 2014, or 417 percent of annual expenditures in that year.
• Projected OASDI tax income will begin to fall short of outlays in 2017, remaining sufficient to finance 100 percent of scheduled annual benefits until 2041. Thereafter, income will be sufficient to finance 74 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 represents 4.3 percent of Gross Domestic Product (GDP) today and is projected to rise by just over one-half to 6.4 percent of GDP in 2079.
• The OASDI annual cost rate is projected to increase from 11.13 percent of taxable payroll in 2005, to 16.74 percent in 2030, and to 19.08 percent in 2079.
• The open group ¹ unfunded obligation ² for the program over the 75-year period (from 2005 to 2079 for this report) is $4.0 trillion, up from $3.7 trillion last year.

Issues to Consider

The “Infinite Horizon” Analysis Is Highly Suspect.
In recent years, a new measure of financial adequacy, an “infinite horizon” measure, was added to the Trustees' analysis. 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. T he 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.”

Even With No Changes, Social Security Pays Better than a Privatized System.
Social Security will continue to receive taxes allowing it to pay benefits after exhaustion of the Trust Funds. According to this year's report, Social Security can still pay the vast majority (74 percent) of its promised benefits, even if nothing is changed and Social Security receives no additional financing. In fact, future retirees would always get higher benefits than today's retirees, after adjusting for inflation. These benefits would be greater than what people could expect from a privatized system, according to estimates by the nonpartisan Congressional Budget Office.

Replacing part of Social Security with private accounts, as the Administration has proposed, does nothing to improve solvency. In fact, because the President's proposal would shift large amounts of revenue out of Social Security, it would cause the Trust Fund to become exhausted about 11 years sooner, in 2030, unless coupled with large reductions in Social Security benefits.

The Trustees' Economic Predictions are Pessimistic.
The predictions made each year by the Social Security Trustees depend on specific economic and demographic assumptions. Historically, economic growth has averaged 3.4 percent annually after inflation, according to the Department of Commerce's Bureau of Economic Analysis. For the long-run, however, the Social Security Trustees assumed an inflation adjusted growth rate of 1.8 percent in their 2005 report. At the same time, proposals to divert payroll taxes into private accounts assume significantly higher rates of return (4.6 percent or higher) than would be possible in an environment of such stagnant economic growth.

This has profound implications for the Social Security debate because the estimates are mutually inconsistent. If the Trustees are correct and future growth is at a rate about one-half of historic levels, projected rates of return from private accounts are likely significantly over-inflated. On the other hand, if projected economic growth in the future is high enough to produce the investment returns assumed in private account plans, the existing program would remain solvent much longer than currently projected.

Department of Policy Research, April 2005

• This includes taxes and costs for past, current and future participants
• This is the difference between the present values of Social Security inflows and outflows plus the existing trust fund.

The National Committee is a nonprofit, nonpartisan organization that acts in the interests of its membership through advocacy, education, services, grassroots efforts and the leadership of the board of directors and professional staff. The work of the National Committee is directed toward developing a secure retirement for all Americans.