Highlights of the 2016 Report
Since its inception, Social Security has been the foundation on which America’s retirement security rests. It has demonstrated its strength by paying benefits without interruption in good times and bad, during periods of recession and disaster and during recovery and healing. The program’s durability is demonstrated yet again in this year’s Trustees Report. The report is good news for working Americans and for seniors.
Here are 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 to pay 79 percent of all benefits owed.
- Social Security remains well-funded. With the economy in recovery, the Trustees estimate that, in 2016, Social Security’s total income will exceed its expenses by over $15.7 billion. In fact, the Trustees estimate that total annual income is expected to exceed program obligations until 2020.
- The Trustees report there is now $2.81 trillion in the Social Security Trust Fund, which is $23 billion more than last year, and that it will continue to grow by payroll contributions, income taxes paid on benefits, and interest on the Trust Fund’s assets.
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 projected health of the funds over the upcoming 75 years. The 2016 report is the 76th report that has been prepared by the Trustees since the beginning of the program. 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 usually expressed as a “percent of payroll,” meaning the percent of all wages and self-employment income subject to taxation that is projected to be earned by Americans over the 75-year valuation period. The 2016 report finds that the combined OASDI Trust Fund has an actuarial deficit equal to 2.66 percent of payroll, down from 2.68 percent projected last year. This year’s improvement is explained by the change in the valuation period (2016 through 2090) and by modest adjustments made in some of the economic and demographic assumptions on which the estimates are based.
Although the actuarial deficit has improved modestly, the Social Security program’s financial health still needs to be strengthened. Despite the crisis myths perpetuated by some, including many in the media, the National Committee believes that Congress can improve the long-term outlook for Social Security with modest and manageable changes in revenue without enacting harmful cuts for current or future retirees. Recent polling has shown that Americans of all political persuasions value Social Security, want to improve benefits and are willing to pay higher taxes to preserve the program. An example of a broadly-supported change is to lift the payroll tax cap.
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, up to a wage cap of $118,500 in 2016 that increases with the growth in the nationwide average wage. In 1983, the wage cap was set at an amount that 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 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 totals 12.4 percent. 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 revenue from income taxes on Social Security benefits paid by retirees with higher incomes and modest transfers from the general fund. 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 hold these funds until they are needed to pay benefits. The surplus 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 2016 Trustees Report, income from Social Security payroll taxes accounted for about 87 percent of Trust Fund income in 2015 while transfers from the general fund comprised less than one tenth of one percent. Income taxes paid on Social Security benefits represented 3.5 percent, and interest on reserves made up the remaining 9.4 percent.
At the end of 2015, about 60 million people were receiving benefits: 43 million retired workers and their dependents, 6 million survivors of deceased workers, and 11 million disabled workers and their dependents. About 168 million workers had earnings covered by Social Security and paid payroll taxes.
The Importance of the Trust Funds
The Trust Funds, and the interest earned by the assets they hold, form a vitally important element of Social Security’s financing. Although it is fashionable on the part of 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 is 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 limited role in the funding of the program. That is 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.
The Social Security Act of 1983 expanded this role. At that time Congress made the decision, in essence, to partially pre-fund the retirement of baby boomers by accumulating a very substantial balance in the Trust Funds. As the present balance of over $2.81 trillion testifies, Congress was successful in that regard.
Some question whether this plan will work. There are economists who argue 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 the important point 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 made these contributions are well aware of the amounts 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.
And 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. Because of the decision made in 1983 to build up a significant balance in the Trust Funds, we have time to develop that consensus.
Social Security’s Long-Range Outlook
The Trustees project that the Social Security Trust Funds will be able to pay full benefits until the year 2034. After 2034, Social Security will have sufficient annual revenue to pay about 79 percent of benefits. These figures were unchanged from the 2015 report.
The projected actuarial deficit of the Social Security program, measured as a percent of taxable payroll over the 75-year projection period, is 2.66 percent of taxable payroll, compared with last year’s estimate of 2.68 percent.
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 its projected 2016 level of 5.0 percent to about 6.0 percent in 2035. After 2035, Social Security’s cost as a percent of GDP declines to 5.9 percent of GDP by 2050 and thereafter slowly increases to 6.1 percent by 2090.
Seen from this perspective, the projected growth of Social Security is relatively flat and can be managed through modest changes to the program.
National Committee’s Concern
The Trustees Report projects a very modest 0.2 percentage point cost-of-living-adjustment (COLA) for next year. The National Committee is not convinced that this estimate accurately reflects the inflation affecting today’s seniors and believes that Social Security’s COLA needs to be strengthened.
Under current law, a Social Security beneficiary receives an increase in his or her Social Security check each year based on the previous year’s 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.
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, 34 percent of the average senior’s Social Security check will be consumed by Medicare out-of-pocket costs by 2090, compared with 23 percent today.
Seniors cannot afford to have their COLA calculated using an index that does not accurately gauge the spending patterns that are unique to them. That is why the National Committee supports legislation that would base the Social Security COLA on a fully-developed consumer price index for the elderly, or CPI-E, 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.
Our nation needs Social Security more than ever. These modest benefits have become the last remaining pillar of economic security for millions of Americans. Personal savings have been difficult to accumulate because middle class wages have remained stagnant for three decades. More than half of all workers have no retirement plans at work and millions more have no retirement savings. While Social Security has lifted generations of seniors out of poverty, benefits must be improved to protect the growing share of seniors who depend on the program for all or most of their retirement income.
Government Relations and Policy, July 2016