Tag: trustees report

The State of Social Security: Maybe a Little Better, Maybe a Little Worse?

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.

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The Social Security Trustees Report

Editors’ Note: The post below is an expanded version of Tanner’s initial post at this URL.

The Social Security system’s trustees have released their annual report on the system’s finances and announced that – surprise – the program’s looming financial crisis hasn’t gone away.

Social Security will begin running a deficit by 2016, meaning that just seven years from now the program will begin spending more money on benefits than it takes in through taxes. That’s a year sooner than last year’s report.

Of course, in theory, the Social Security Trust Fund will pay benefits until 2037. But even that figure is misleading, because the Trust Fund contains no actual assets. Instead, it contains government bonds that are simply IOUs, a measure of how much money the government owes the system.

Even if Congress can find a way to redeem the bonds, the Trust Fund surplus will be completely exhausted by 2037. At that point, Social Security will have to rely solely on revenue from the payroll tax – and that revenue will not be sufficient to pay all promised benefits. Overall, the system’s unfunded liabilities – the amount it has promised beyond what it can actually pay – now total $17.5 trillion. Yes, that’s trillion with a ‘T.’ That’s $1.7 trillion worse than last year.

Critics of personal accounts for Social Security have pointed to the decline in the stock market over the last few years as an argument against allowing younger workers to privately invest a portion of their Social Security taxes. Yet studies [more here and here] have shown that long-term investment remains remarkably safe. If workers retiring today had been allowed to start privately investing their taxes 40 years ago, they would obviously have less money than those who retired a couple of years ago.But they would still have more than Social Security promises. And, as the Trustee’s Report shows, a poor economy hurts Social Security’s ability to pay benefits just as it hurts the stock market.

In the end, there are only three possible solutions to Social Security’s problems: raise taxes (and the Social Security payroll tax would have to be nearly doubled to keep the program afloat), cut benefits, or allow younger workers to invest privately.

We can have an honest debate about which of those options is the best choice. But, as the Trustee’s Report makes clear, Congress and the Obama administration cannot continue to duck the issue.

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