Highlights of the 2023 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. While the ultimate course of the COVID pandemic continues to cloud future economic trends, the 2023 report provides an important reassurance for working Americans and for seniors.
The 2023 report shows that Social Security will continue to play a critical role in the lives of the 66 million beneficiaries and the 181 million covered workers and their families who depend on the program now or will depend on it when they retire in the future.
Here are some of the highlights:
- Social Security’s health remains sound. The system remains stable and will be able to pay full benefits for many years to come — until 2034 — one year earlier than in last year’s report. Thereafter, there will still be enough income coming into the program to pay about 80 percent of all benefits owed, declining to 74 percent in 2097.
- Social Security remains adequately funded for now. The Trustees estimate that, in 2023, Social Security’s total income, along with the assets in the trust funds, will be more than sufficient to pay full scheduled benefits.
- According to the Trustees, the program is fully funded for more than a decade, around 89 percent funded for the next 25 years, around 83 percent funded for the next 50 years, and 80 percent funded over the next 75 years.
- The Trustees report that there is now about $2.83 trillion in the Social Security Trust Funds and that these reserves will continue to contribute to the funding of the program, yielding interest income of about $66 billion in 2022.
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 (ending 2097). The 2023 report is the 83rdreport that has been prepared by the Trustees since the beginning of the program. With the help of the Social Security Administration’s actuaries, the Trustees estimate the income and expenditures of the Funds, considering projections of both demographic and economic factors.
The Social Security Trust Funds are in long-range balance when the income to the Funds exceeds expenditures over the upcoming 75-year valuation period. 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 that is projected to be earned by Americans over the 75-year valuation period. The 2023 report projects that the combined OASDI Trust Funds have an actuarial deficit equal to 3.61 percent of taxable payroll, an increase from the 3.42 percent shortfall projected in last year’s report.
The persistence of an actuarial deficit is a reminder that the Social Security program’s financial health still needs to be strengthened. Despite the crisis rhetoric used 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. Polling has consistently 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.
That is why the National Committee enthusiastically endorses legislation that extends the financial footing of Social Security. Bills such as those introduced by Representative John Larson (D-CT) and Senator Bernie Sanders (I-VT), show how Social Security’s future can be redeemed for both current and future retirees. Both bills ask the wealthy to pay their fair share to strengthen Social Security, something supported by overwhelming majorities of the American people. This legislation also calls for significant improvements in the benefits provided by Social Security.
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 earnings, up to a cap of $160,200 in 2023, up from $147,000 in 2022. The cap 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. But because wages above the cap have grown much faster than average, earnings under the cap now comprise about 82 percent of aggregate 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. The Trust Funds are also credited with interest from their 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. When income to the Trust Funds in a year has exceeded 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 comprise 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”, and they remain available, when needed, to help pay benefits to current retirees. In fact, $22 billion in trust fund assets were redeemed in 2022 to help pay benefits.
The cost of administering the Social Security program is modest. The net administrative expenses of the OASI and DI Trust Funds combined in 2022 totaled $6.7 billion, equal to 0.5 percent of the total cost and 0.6 percent of total income of both programs. Of that amount, the OASI Trust Fund net administrative expenses totaled 0.4 percent of both cost and income, and the DI Trust Fund net administrative expense totaled 1.7 percent of total income and 1.9 percent of total cost.
At the end of 2022, about 66 million people were receiving benefits: 51 million were retired workers and their dependents; 6 million were the survivors of deceased workers; and about 9 million were disabled workers and their dependents. About 181 million workers had earnings covered by Social Security and paid payroll taxes in 2022.
The Importance of the Trust Funds
Although it is fashionable on the part of some to dismiss the importance of the Social Security Trust Funds and to discount the interest 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 substantial portfolio of assets they now hold by accident.
Throughout most of the history of Social Security, 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 Amendments of 1983 expanded the role of the Trust Funds. At that time Congress made the decision, in essence, to partially advance-fund the retirement of the baby boomers by accumulating a very substantial balance in the Trust Funds. As the present balance of over $2.83 trillion testifies, Congress was successful in achieving this goal.
Some, however, question whether this plan will work. There are economists who argue that the balances in the Trust Fund, 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 must 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 aware of the amounts that were deducted from their paychecks, and they expect the U.S. government will redeem these bonds when they are needed to pay benefits, 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 soon to strengthen the financial soundness of the Social Security program so that it remains available to all Americans and can pay all benefits that are owed, 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. But because of the decisions 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 2023 Trustees Report projects that the Social Security Trust Funds will be able to pay full benefits until the year 2034. After 2034, Social Security will have annual revenue sufficient to pay about 80 percent of benefits, declining to 74 percent in 2097, a modest reduction over the projection in the 2022 report.
The actuarial deficit of the Social Security program, measured as a percent of taxable payroll over the 75-year valuation period, is projected to be 3.61 percent, which is slightly worse than the deficit projected in the 2022 report.
The annual cost of the program is estimated at 5.2 percent of Gross Domestic Product (GDP) in 2023, modestly increasing to 6 percent of GDP in 2097. The 75-year actuarial deficit equals 1.3 percent of GDP through 2097, a slight increase from the 1.2 percent deficit estimated last year.
National Committee Concerns
The 2023 Trustees Report projects a 3.3 percent cost-of-living adjustment (COLA) for next year. As the result of pandemic-related inflation, the COLA was 8.7 percent in 2023 and 5.9 percent in 2022. While the 2023 COLA was the highest since 1981, the National Committee believes that the estimating methodology used by the Bureau of Labor Statistics does not fully reflect the effect of inflation on today’s seniors. We further believe that Social Security’s COLA needs to be strengthened. The need for doing so is forcefully demonstrated by the fact that the average COLA over the past twelve years, excluding 2021 and 2022, was only 1.4 percent, and in three of those years there was no COLA at all.
Under current law, a Social Security beneficiary receives an increase in his or her Social Security check each year based on the previous year’ 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 based on the Bureau of Labor Statistics’ measurement of the increase of the cost of a market basket of goods and services for urban wage earners and clerical workers 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.
Unlike the urban wage earners and clerical workers upon whom the Consumer Price Index is based, 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 benefits will be eaten up by rising health care costs. According to the Medicare Trustees, 42 percent of the average senior’s Social Security benefit will be consumed by Medicare out-of-pocket costs in 2097, compared with 28 percent in 2023.
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. We are pleased to note that a number of bills introduced by members of Congress, including those sponsored by both Representative Larson and Senator Sanders, which we mentioned earlier, require use of the CPI-E in determining COLAs for Social Security.
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 wages have remained stagnant for decades. More than half of all workers have no retirement plans at work and millions more have little or 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.
Social Security is strong. It provides a steady and reliable source of income for the more than 66 million individuals who receive benefits from the program. It also provides more than $1.6 trillion in annual economic stimulus as seniors spend their benefit for essential goods and services in their communities. Now is the time to strengthen a program that remains central to the economic well-being of all Americans — those who are retired today and those who one day hope to be retired.
Government Relations and Policy, April 2023