The Social Security Trustees released their annual report yesterday, showing a small improvement in the system’s finances over the long-term. That’s rather surprising given that the recent recession has reduced the program’s revenues and brought forward the date when the program begins to drain money from the general budget — from 2016 last year to 2015 in the new report. The Trust Fund exhaustion date is 2037, the same as it was in last year’s report.
The new health care law is likely to increase the program’s revenues as employers reduce payroll-tax-free health insurance coverage and offset the reduction in employee compensation through higher wages that would be subject to payroll taxes. This sets up a competition between the health care law–induced increase in Social Security revenues and declines in revenues and increases in outlays for other reasons — a sluggish economy, improving longevity, the addition of another year at the end of the 75-year projection horizon, and changes in economic and demographic data, assumptions, and methods.
The positive revenue effect of the health care law (14 basis points) more than offsets the negative effects of all of the other factors (6 basis points) on the system’s long-range actuarial balance. That yields a total improvement of the program’s actuarial balance from –2.00 percent of taxable payroll to –1.92 percent. In next year’s report, however, this year’s “legislative” effects may be folded into changes from technical adjustments and incoming data. We may never know whether today’s assumptions on the revenue effects of the health care law are correct or not.
It could be that those assumptions are too large, especially if Congress postpones the tax on Cadillac health care plans because of pressure from unions. It could also be too small if many employers decide to eliminate health insurance coverage and opt to pay the less costly penalty. On balance, I’ve concluded that, faced with such wide uncertainty about future outcomes, the Social Security trustees have chosen to be relatively conservative in their estimates of the health care law’s revenue effect.
Another curious item is that the program’s long-range imbalance increased from $15.1 trillion to $16.1 trillion. However, the report states that “the near-term negative effects on employment of the slightly deeper recession than assumed last year are offset by higher than expected real growth in the average earnings level” (Section D: Projections of Future Financial Status). As a result, the program’s total (infinite-horizon) imbalance ratio declines from 3.4 percent in 2009 to 3.3 percent today.
Note that a deeper recession and higher unemployment than was assumed last year does not necessarily justify a correspondingly faster recovery, with unchanged long-term equilibrium unemployment and earnings growth rates. The trustees are discounting the possibility that the unemployment rate may remain higher than was assumed last year and that, therefore, earnings may not rebound any faster compared to last year’s assumptions. It appears that that incoming data on unemployment and GDP growth played little if any role in informing assumptions about future earnings growth rates.
Finally, it should be noted that this year there were no public trustees to oversee and modulate the report as it was being produced.