Highlightsof the 2015 Report
Sinceits inception, Social Security has been the foundation on which America’sretirement security rests. It has demonstrated its strength by payingbenefits without interruption in good times and bad, during periods ofrecession and disaster and during recovery and healing. The program’sdurability is demonstrated yet again in this year’s Trustees Report. The reportis good news for working Americans and for seniors.
Hereare some of the highlights:
- Social Security remains strong,and will be able to pay full benefits for many years to come – until 2034.Thereafter, there will still be enough income coming into the program topay 79 percent of all benefits owed.
- Social Security remainswell-funded. With the economy in recovery, the Trustees estimate that, in2015, Social Security’s total income will exceed its expenses by over $9.2billion. In fact, the Trustees estimate that total annual income isexpected to exceed program obligations through 2019.
- The Trustees report there isnow nearly $2.79 trillion in the Social Security Trust Fund, which is $25billion more than last year, and that it will continue to grow by payrollcontributions, income taxes paid on benefits, and interest on the TrustFund’s assets.
TheSocial Security Act established a Board of Trustees to oversee the Old-Age,Survivors and Disability Insurance Trust Funds (OASDI), popularly known as theSocial Security Trust Funds. Each year the Trustees issue a report on thefinancial status of the Trust Funds. The report is a snapshot of the projectedhealth of the funds over the upcoming 75 years. The 2015 report is the 75threport that has been prepared by the Trustees since the beginning of theprogram. With the help of the Social Security Administration actuaries, theTrustees estimate the income and expenditures of the Funds, taking into accountprojections of both demographic and economic factors.
TheSocial Security Trust Funds are considered to be in long-range balance when theincome to the Funds exceeds expenditures over 75 years. When income doesnot 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 andself-employment income subject to taxation that is projected to be earned byAmericans over the 75-year valuation period. The 2015 report finds that thecombined OASDI Trust Fund has an actuarial deficit equal to 2.68 percent ofpayroll, down from 2.88 percent projected last year. This year’simprovement is explained by the change in the valuation periodand by modest adjustments made in some of the economic and demographicassumptions on which the estimates are based.
Althoughthe actuarial deficit has improved modestly, the Social Security program’sfinancial health still needs to be strengthened. Despite the crisis mythsperpetuated by some, including many in the media, the National Committeebelieves that Congress can improve the long-term outlook for Social Securitywith modest and manageable changes in revenue without enacting harmful cuts forcurrent or future retirees. Recent polling has shown that Americans of allpolitical persuasions value Social Security, want to improve benefits and arewilling to pay higher taxes to preserve the program. An example of abroadly-supported change is to lift the payroll tax cap.
Sourcesof Funding for Social Security
SocialSecurity is financed mainly through payroll taxes on wages and self-employmentincome. Employees and employers each make contributions equal to 6.2 percent ofwages, up to a wage cap of $118,500 in 2015 that increases with the growth inthe nationwide average wage. In 1983, the wage cap was set at an amountthat would tax about 90 percent of all wage income in the United States. Since then, wages at the high end of the income scale have risen faster thanaverage paychecks in recent years, so today the cap only covers about 83percent of wages.
Theself-employed contribute the equivalent of the combined employer and employeetax rates, which totals 12.4 percent. They are then allowed to deduct theequivalent of the employer’s share from their income taxes.
Inaddition to payroll tax contributions, Social Security receives revenue fromincome taxes on Social Security benefits paid by retirees with higher incomes.It is also credited with interest from its Treasury bond holdings.
TheSocial Security Trust Funds
Whenworking Americans pay their Social Security payroll taxes to the U.S. Treasury,those taxes are credited to the Social Security Trust Funds. These funds areused to pay Social Security benefits. If income to the Trust Fundsexceeds the amount of benefits that the program is obligated to pay, then theSocial Security Trust Funds hold these funds until they are needed to paybenefits. The surplus income is used to purchase special issue U.S.government bonds that are backed by the full faith and credit of the UnitedStates and which earn a rate of return similar to that earned by otherlong-term U.S. securities. These bonds are the assets of the TrustFunds. 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.”
Accordingto the 2015 Trustees Report, income from Social Security payroll taxesaccounted for about 85 percent of Trust Fund income in 2014 while transfers fromthe general fund comprised about one tenth of one percent. Income taxespaid on Social Security benefits represented 3 percent, and interest on reservesmade up the remaining 11 percent.
Atthe end of 2014, about 59 million people were receiving benefits: 42 millionretired workers and their dependents, 6 million survivors of deceased workers,and 11 million disabled workers and their dependents. 166 million workershad earnings covered by Social Security and paid payroll taxes.
TheImportance of the Trust Funds
TheTrust Funds, and the interest earned by the assets they hold, form a vitallyimportant element of Social Security’s financing. Although it is fashionable onthe part of some to dismiss the importance of the Social Security Trust Fundsand to discount the income produced by their assets, the Trust Funds are anessential element of the program’s funding. And it is important toemphasize that the Trust Funds did not accumulate the huge sums they now holdby accident.
Throughoutmost of the history of the program, the Trust Funds played only a limited rolein the funding of the program. That is because for many years thebalances they held were relatively small and were used only as a contingencyreserve to tide the program over in years when revenue temporarily fell belowthe level needed to pay benefits.
TheSocial Security Act of 1983 expanded this role. At that time Congressmade the decision, in essence, to partially pre-fund the retirement of babyboomers by accumulating a very substantial balance in the Trust Funds. Asthe present balance of over $2.79 trillion testifies, Congress was successfulin that regard.
Somequestion whether this plan will work. There are economists who argue thatthe balances in the Trust Funds, and the interest they earn, are noteconomically meaningful. Others question how the bonds would be redeemedwhen the money is needed to pay benefits. Still others argue that theprogram has to be cut to make sure that the Trust Funds’ assets never have tobe drawn down.
Webelieve the important point to remember about the Trust Funds is that they holdbonds that were purchased with money that was paid into the program by millionsof Americans. Those who made these contributions are well aware of theamounts that were deducted from their paychecks, and they expect the U.S.government will redeem these bonds just like any other debt obligation it has.
Andthey have the law on their side in that regard. Section 201(d) of theSocial Security Act says that “Each obligation issued for purchase by theTrust Funds shall be evidenced by a bond, note, or certificate of indebtednesssetting forth the principal amount, date of maturity, and interest rate of theobligation and stating on its face that the obligation shall be supported bythe full faith and credit of the United States, and that the United States ispledged to the payment of the obligation with respect to both principal andinterest.”
Clearly,it is important that action be taken to strengthen the financial soundness ofthe Social Security program so that it remains available to all Americans, bothnow and in the future. There are many different options for strengtheningthis vital program, and developing a consensus remains a challenge that must bemet by the nation’s leaders. Because of the decision made in 1983 tobuild up a significant balance in the Trust Funds, we have time to develop thatconsensus.
SocialSecurity’s Long-Range Outlook
TheTrustees project that the Social Security Trust Funds will be able to pay fullbenefits until the year 2034, which represents a 1-year improvement over lastyear’s report. After 2034, SocialSecurity will have sufficient annual revenue to pay about 79 percent ofbenefits, a two percentage point increase over last year’s estimate.
Theprojected actuarial deficit of the Social Security program, measured as apercent of taxable payroll over the 75-year projection period, is 2.68 percentof taxable payroll, compared with last year’s estimate of 2.88 percent.
SocialSecurity Relative to Gross Domestic Product
Anotherimportant way to look at Social Security’s future is to view its annual costand 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 theTrustees to rise from its projected 2016 level of 4.89 percent to about 6.05 percentin 2037. After 2037, Social Security’scost as a percent of GDP declines to a low of 5.93 percent of GDP by 2050 and thereafterslowly increases to 6.19 percent by 2089.
Seenfrom this perspective, the projected growth of Social Security is relativelyflat and can be managed through modest changes to the program.
TheDisability Insurance Trust Fund
TheDisability Insurance (DI) Trust Fund represents a special case. The Trusteesproject that the DI Trust Fund will be depleted in 2016, the same yearprojected in last year’s report. After 2016, 81 percent of scheduledbenefits will be payable. Disability expenditures have increased primarily dueto demographic trends – as baby boomers age into the disability-prone years (theyturn ages 50 to 68 in 2014), more people become disabled and thus receivebenefits. The increase in full retirement age from 65 to 66 (and to 67for those born after 1959) has also contributed to the increase in disabilityexpenditures, as people remain on the disability rolls longer before shiftingto retirement.
Congresshas reallocated income across the Social Security Trust Funds 11 times – fromthe Old- Age and Survivors Insurance Trust Fund to the DI Trust Fund and viceversa. When Congress took action in 1994 to address a then-reported shortfallin the DI Trust Fund, it knew that it would have to take action again in 2015or 2016. In fact, like this year’s report, the Social Security TrusteesReport for 1995 projected that the DI Trust Fund would be depleted in 2016. Areallocation of part of the 6.2 percent Social Security tax rate from theOld-Age and Survivors Insurance Trust Fund to the DI Trust Fund would ensurethat both funds can pay full benefits until 2034, after which about 79 percentof scheduled benefits would be covered.
TheTrustees Report projects no cost-of-living-adjustment (COLA) for nextyear. The National Committee is not convinced that this estimateaccurately reflects the inflation affecting today’s seniors and believes thatSocial Security’s COLA needs to be strengthened.
Undercurrent law, a Social Security beneficiary receives an increase in his or herSocial Security check each year based on the previous year’s increase in thecost of living. This COLA is intended to offset the individual’sadditional expenses resulting from inflation. The Social Security COLA ismeasured based on the increase in the cost of a market basket of goods andservices from the third quarter of one year to the third quarter of the nextyear. The size of the COLA is announced by the Social SecurityAdministration, usually in October, and beneficiaries see the change in theirJanuary Social Security payment.
Seniorsspend a significant portion of their income on out-of-pocket health careexpenses not covered by Medicare. As time goes by, more and more of theirSocial Security benefit checks will be eaten up by rising health carecosts. According to the Medicare Trustees, 36 percent of the averagesenior’s Social Security check will be consumed by Medicare out-of-pocket costsby 2089, compared with 23 percent today.
Seniorscannot afford to have their COLA calculated using an index that does notaccurately gauge the spending patterns that are unique to them. That iswhy the National Committee supports legislation that would base the SocialSecurity COLA on a fully-developed consumer price index for the elderly, orCPI-E, that better reflects the purchasing patterns of seniors. This kind ofspecialized index should be used to make sure that seniors’ buying power doesnot erode over time.
Ournation needs Social Security more than ever.These modest benefits have become the last remaining pillar of economicsecurity for millions of Americans.Personal savings have been difficult to accumulate because middle classwages have remained stagnant for three decades. More than half of all workers have no retirement plans at work andmillions more have no retirement savings. While Social Security has liftedgenerations of seniors out of poverty, benefits must be improved to protect thegrowing share of seniors who depend on the program for all or more of theirretirement income.
Government Relations and Policy, July 2015
Changing the valuation period this year involves dropping 2014, a year with anet surplus, and replacing it with 2089, a year with no surplus.