(emphasis added)
The annual cost of Social Security benefits represents 4.3 percent of Gross Domestic Product (GDP) today and is projected to rise to 6.4 percent of GDP in 2079. The projected 75-year actuarial deficit in the combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds is 1.92 percent of taxable payroll, up slightly from 1.89 percent in last year's report. The program continues to fail our long-range test of close actuarial balance by a wide margin. Projected OASDI tax income will begin to fall short of outlays in 2017 and will be sufficient to finance only 74 percent of scheduled annual benefits by 2041, when the combined OASDI trust fund is projected to be exhausted.
Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 15 percent in the amount of payroll taxes or an immediate reduction in benefits of 13 percent (or some combination of the two). To the extent that changes are delayed or phased in gradually, greater adjustments in scheduled benefits and revenues would be required. Ensuring that the system is solvent on a sustainable basis over the next 75 years and beyond would also require larger changes.
. . .
... The financial outlook for Social Security has improved marginally since 2000 due to a myriad of factors, including updated information on immigration, a better economic outlook and improvements in projection methodology. Annual cash-flow deficits for the combined OASDI Trust Funds are now projected to begin two years later (2017 rather than the 2015 date projected five years ago), the exhaustion of trust fund assets is projected to occur four years later (2041 rather than 2037), and Social Security's cost as a percentage of gross domestic product (GDP) at the end of the 75-year period has decreased from 6.8 to 6.4. However, once they begin, the program's annual cash-flow deficits are still projected to grow rapidly through mid-century–and then more slowly thereafter–with trust fund income sufficient to pay only 74 percent of scheduled benefits at the time of asset exhaustion and 68 percent at the end of the 75-year projection period.
In sharp contrast, Medicare's financial outlook has deteriorated dramatically over the past five years and is now much worse than Social Security's. ...
The change in the outlook is equally stark for SMI, ...
. . .
A notable addition to the Trustees Reports during our tenure has been the inclusion of new measures that summarize program finances for a period extending beyond the traditional 75 years and indicate whether those finances can be expected to improve in this extended time frame. These measures indicate that both Social Security and Medicare will be subject to increasing deficits into the indefinite future under current policies . ...
on 2005 Social Security and Medicare Trust Fund Reports
“... For Social Security, this year's report shows a small deterioration from last year's report. It once again demonstrates that the Social Security program is seriously under-funded and financially unsustainable in the long run. Cash flows peak in 2008 and turn negative in 2017, and the trust fund itself will be exhausted in 2041. The latter two dates are one year earlier than last year's report due to slightly higher benefit expenditures and slightly lower revenue than anticipated. The unfunded obligation, that is, the ifference between the present values of Social Security inflows and outflows plus the existing trust fund, is $11.1 trillion on a permanent basis, and $4.0 trillion over the next 75 years. The actuarial imbalance as a percent of taxable payroll is -1.92 percent over 75 years and -3.5 percent over the indefinite future. This means that taxes would have to be raised immediately by 3.5 percentage points, or benefits reduced immediately by 22 percent, to make the system whole on a permanent basis.
“...
“As this report shows, a 3.5 percent payroll tax rate increase would achieve long-term balance. But we don't think that's the way to go because it is an economically damaging solution. Payroll taxes have been raised some 20 times since Social Security was established and those increases have failed to make the system solvent. Raising the payroll tax will harm our economy and hurt job growth. Even the most resilient economy can be devastated by dramatic tax increases
“...
“Let me now offer a few words on the 2005 Medicare Trustees' Report. Although the 2005 Medicare Report shows a slight improvement over ast year's report, more fundamentally it reveals even greater challenges. While Medicare faces the same demographic challenges as Social Security, it is additionally burdened by sharp increases in underlying health care costs.
“Cash flow for the Hospital Insurance (HI) Trust Fund is projected to be negative again this year, as in 2004. Taking interest into account, total trust fund income is projected to exceed expenditures through 2012. The Hospital Insurance Trust Fund is projected to become insolvent in 2020, one year later than projected in last year's report and the 75-year actuarial imbalance as a percent of payroll is -3.09, a 0.03 percent improvement from last year's report.
“The Supplementary Medical Insurance (SMI) Trust Fund, including expenditures associated with the prescription drug program, is financed in arge part by general revenues. SMI expenditures are projected to increase rapidly, resulting in increasing pressures on future federal budgets. General revenue financing for SMI is expected to increase from 0.9 percent of GDP in 2004 to 6.2 percent in 2079. The projected growth in SMI expenditures poses serious issues for the federal budget and, in turn, the U.S. economy.
“Controlling health care costs is the real key to the long run fiscal sustainability of both Medicare and in turn the federal budget. Indeed,according to this year's Trustees' Report, reducing the projected growth in per beneficiary health care costs to one percentage point lower would reduce the 75-year actuarial imbalance for the HI program by two thirds.
“The Administration is addressing the issue of rising health care costs through the creation of Health Savings Accounts (HSAs) – already available and gaining in popularity – reducing the lawsuit abuse that increases costs and reduces access to necessary medical services, creating Association Health Plans to increase the affordability and availability of health insurance for small-business owners and their employees, and modernizing medical technology with new investments in health information technology. It is estimated that a national health information network, for example, could save about $140 billion per year through improved care and reduced duplication of medical tests. ...”
PRESIDENT BUSH: Each year we wait costs an additional $600 billion, which will continue to rise. The longer we wait to take action, the more difficult and expensive the changes will be.
(emphasis added)
In last year's report the unfunded obligation over the infinite horizon was reported as $10.5 trillion in present value as of January 1, 2003. The change to the later valuation date for this report, January 1, 2004, tends to increase the measured deficit by about $0.6 trillion.
However, the effects of changes in data and methods more than offset this increase. See section IV.B.8 for details.
As noted in the previous section, the $10.4 trillion infinite future open group unfunded obligation may also be expressed as a percentage of the taxable payroll over that period. This actuarial deficit for the infinite future is 3.5 percent of the taxable payroll under the intermediate assumption, down from an estimated 3.8 percent of payroll in last year's report .
This unfunded obligation can also be expressed as a percentage of GDP over the infinite future and is 1.2 percent on that basis. These relative measures of the unfunded obligation over the infinite future express its magnitude in relation to the resources that are potentially available to finance the shortfall.
20 04 Trustees Report, PDF version p66, numbered p58 bottom
Repor ts for previous years are also available. The 2003 figures
corresponding to the $10.4 trillion and $3.7 trillion on page 59 in the 2004 reports can be found on page 62 of the 2003 Trustees
Report, a 126 page document, as well as in the HTML version and are $10.5 trillion and $3.5 trillion through 1977, respectively.
The Trustees have provided a Summary of the 2004 Trustees Report covering both Social Security and Medicare.
This report gives the dates on which both the Old Age and Survivor combined with Disability Insurance (OASDI) begin to experience
deficiencies in income versus cost, and also the Medicare program experiences deficiencies. Under the "intermediate"
projection, the dates for OASDI to experience shortfalls of income exclusive of interest income is 2018, or shortfall of
total income including interest of 2028, and the date for Medicare to experience a shortfall of 2004.
The Summary gives the dates on which the OASDI Trust Fund is projected to be exhausted under the "intermediate" projection of
2042, and the date on which Medicare, also known as HI or Health Insurance, is expected to exhaust all its reserves
in 2026 (p.16 of 2003 Summary PDF).
Here are links to other reports and summaries:
The Year 2018
President Discusses Strengthening Social Security in North Carolina
(emphasis added)
“... for example, in 2027, the government is going to have to come up with $200 billion more to meet the promises that we've
made, above and beyond payroll taxes. Every year from 2018 to when the system goes broke in 2042, the cash deficits required
to meet promises increase. That says to me we've got a problem.
Now, I know 13 years doesn't sound like a lot – 2018 –it may seem like a lot to people whose perspective is maybe two years ...”
PRESIDENT BUSH:
“ ... In 2018, the government will begin to pay out more
in Social Security benefits than it gets in revenue – and shortfalls then will grow larger with each passing year. By 2042, when workers in their mid-20s today begin to retire, the system will be bankrupt –
unless we act now to save it. ...”
(emphasis added)
“... estimated cost starts to exceed income (including interest) in 2028 . This occurs because of
a variety of factors ... . Estimated cost starts to exceed income excluding interest even earlier, in 2018 . At that time, to
meet all OASDI cost on a timely basis, the trust funds would begin to redeem assets (Treasury securities). ...”
See page 178 of the 2004 report. Or see page 2 of the 2006 Required Supplementary Information section of the Financial Section of the SSA's Performance and Accountability Report for Fiscal Year (FY) 2006 , which states the estimated costs starts to exceed income (including interest) in 2027, one year sooner.
See "Social Security" discussion pp.3-4
(emphasis added)
President Discusses Strengthening Social Security in North Carolina
“... for example, in 2027, the government is going to have to come up $200 billion more to meet the promises
that we've made, above and beyond payroll taxes. Every year from 2018 to when the system goes broke in 2042 , the cash
deficits required to meet promises increase. ...”
In order to find the figure of $200 billion it is necessary to convert the data of tables such as VI-F5 on page 171 of the Trustees Report
from a ratio of cost to GDP into a dollar amount. (This chart may also be accessed at VI_OASDHI_GDP.html#wp118436 .)
By loading this chart into Excel and adding formulas to multiply the GDP for each year, given on the chart, by the cost and income ratios for each year,
we can make the conversion to dollar amounts.
(Chart best viewed in Microsoft Internet Explorer 5.0 and higher.)
The 2004 SSA Trustee's Report does not mention 2027 specifically. However, it gives dollar estimates of the cost on Chart VI-F8.
From Table VI-F8 (and from the chart below based on it) you will see that, under the "intermediate" set of assumptions, in 2025 the estimated surplus/deficit is a surplus of $53.9 billion.
You will also see that, in 2030, a deficit of $70.6 billion is projected. This table shows only every fifth year; the figures for 2027 have to be interpolated. In order for the deficit to
equal $200 billion in 2027, one must disregard the interest income from the assets in the Trust Fund. The "Assets" in the righthand column are the Trust Fund Assets projected to be exhausted in 2042.
This projection has been revised, so that by the 2007 Trustees Report, the "Assets" in the righthand column are the Trust Fund Assets projected to be exhausted in 2041, one year sooner.
The full Table VI-F8 shows every fifth year from the present until the Trust Fund is exhausted (intermediate and high cost estimates), or until 2080 if the Trust Fund is not exhausted (the low cost estimate). The chart below, excerpted
from the full Table VI-F8, shows only 4 years covering 2025 through 2040, and only figures for the intermediate estimate, which the Trustees consider the most likely of their three projections. A sixth column has been added to the chart below subtracting the Cost from the Income excluding interest , to get the surplus or deficit for that year.
Excerpt from Table VI.F8. – Operations of the Combined OASI and DI Trust Funds, in Constant 2004 Dollars,1 Calendar Years 2004-80
[In billions]
Calendar year Income excluding interest Interest income
Total income Cost [calculation supplied]
[Surplus / Deficit ]
Assets at end of year
Intermediate
2025
861.4
215.2
1,076.6
1,022.7
53.90
3,772.8
2030
925.8
185.2
1,111.0
1,181.6
- 70.60
3,184.0
2035
995.0
124.9
1,119.9
1,320.2
- 200.30
2,061.9
2040
1,068.6
38.5
1,107.1
1,432.6
- 325.50
485.2
Proposals On The Table
The Office of the Chief Actuary (OACT) at Social Security has prepared a complete actuarial analyses, showing the estimated effects on the long-range financial
status of the OASDI program, which would likely result from various proposals currently "on the table" that address the long-range solvency problem of OASDI
Differing assumptions are used, and the OACT groups its analyses according to the assumptions used.
Using Intermediate Assumptions of the 2004 Trustees Report:
See also these links:
Using the Intermediate Assumptions of the 2003 Trustees Report:
Using the Intermediate Assumptions of the 2002 Trustees Report:
Using the Intermediate Assumptions of the 2001 Trustees Report:
(emphasis added)
PRESIDENT BUSH: “... by the year 2042 , the entire system would be bankrupt. If we do not act now to avert that outcome, the only
solutions would be dramatically higher taxes, massive new borrowing or sudden and severe cuts in Social Security benefits or
other government programs . ...”
(emphasis added)
PRESIDENT BUSH: “... just look at the chart and you come up with the conclusions. It is serious because if Congress says no to the President, we're not going the move forward on this,
imagine what the solutions will be when the $200 billion hits, or the $210 billion a year, or the $300 billion. I mean, you're looking at either
major tax increases, major cuts in benefits, major cuts in other government programs or massive debt . And so now is the time to move.
And that's what I'm saying to the Congress. ...”
Solutions proposed by the Trustees
(emphasis added)
“... Over the full 75-year projection period the actuarial deficit estimated for the combined trust funds is 1.89 percent of taxable ayroll–slightly lower than the 1.92 percent deficit projected in last year's report. This deficit indicates that financial adequacy of the
program for the next 75 years could be restored if the Social Security payroll tax were immediately and permanently increased from its current level of 12.4 percent
(for employees and employers combined) to 14.29 percent . Alternatively, all current and uture benefits could be immediately reduced by about 13 percent.
Other ways of reducing the deficit include making transfers from general revenues or adopting some combination of approaches.
If no action were taken until the combined trust funds become exhausted in 2042, much larger changes would be required. For example,payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2042.
In this case, the payroll tax would be increased to 16.91 percent at the point of trust fund exhaustion in 2042 and continue rising to 18.31 percent in 2078.
Similarly, benefits could be reduced to the level that is payable with scheduled tax rates in every year beginning in 2042. Under this scenario, benefits would be reduced 27 percent at the point of trust fund exhaustion in 2042, with reductions reaching 32 percent in 2078.
Changes of this magnitude would eliminate the actuarial deficit over the 75-year period through 2078. However, because of the increasing average age of the population, Social Security's annual cost will very likely continue to exceed tax revenues after 2078. As a result,
ensuring the sustainability of the system beyond 2078 would require even larger changes than those needed to restore actuarial balance for the 75-year period ...”
“... Our problem with respect to retirement has got nothing to do with finance, it's got to do with real assets, real physical resources and goods and services that people consume. What the test in this context of our individual financial systems should be...is do they or do they not create savings to create the capital assets?" Finally, he noted that "moving to a forced-savings account," as recommended by President Bush, "technically does not materially affect net national savings. ...”
The Senate Committee for Banking, Housing and Urban Affairs does not yet have a printable version of the hearing as of the 3/1/2005 update of
this page. However a Wall Street Journal article s posted by the Committee which does not mention Chairman Greenspan's remarks about Social Security.
CBS gives an Associated Press report of the testimony which also includes Chairman Greenspan's remarks about Social Security.
The Democratic Policy Committee posts its report of the testimony including Chairman Greenspan's remarks about Social Security, with lead-in caption by Bloomberg News Service.
A transcript of the entire testimony is not available, but Federal Reserve Board website has the text of the Chairman's prepared testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate.
This presentation was given on February 16, 2005 before the Senate Banking Committee and on
February 17, 2005 before the Committee on Financial Services, U.S. House of Representatives, on February 17, 2005.
VI. APPENDICES – F. ESTIMATES FOR OASDI AND HI, SEPARATE AND COMBINED
(emphasis added)
“ ... An additional factor that has made the overall ratio of taxable payroll to GDP decline in recent years is the decline in the ratio
of taxable wages to covered wages , as a result of the relatively greater increases in wages for persons with wages above the contribution
and benefit base . This decline in the taxable ratio is assumed to continue at a slower pace through 2013, with no further decline thereafter. ...”
President Discusses Social Security in Radio Address
“... A young person who earns an average of $35,000 a year over his or her career would have nearly a quarter million dollars saved in his or her own retirement account...”
$35,000 Earner, 4% Divesion to Personal Account, $250,000 at Retirement – Calculations
Done by L.G. Harper Using Excel spreadsheet
PRESIDENT BUSH: “... A young person who earns an average of $35,000 a year over his or her career
would have nearly a quarter million dollars saved in his or her own retirement account...”
Let the young person be 20 years old, male, retiring at age 67 (normal retirement age), who earns an exactly $35,000 a year over his or her career (no raises, no reductions).
Let us further assume the person is self-employed, so there is no external employer paying part of
his Social Security payroll tax; he pays it all himself. And let the person elect
to invest in a "personal account" at Social Security the entire 4% of taxable earnings allowable.
There will be a 12.5% Social Security payroll tax on his $35,000, or $4,375 per year, but of that amount $1,400
will go into his personal account rather than directly into Social Security as it does now.
Now, let us set the interest rate our person will earn throughout his career be a constant 4.85%.
So, starting at his 20th birthday our person gets a job, begins his personal account, and works until
his 67th birthday, or a total of 47 years.
If you plug this into a spreadsheet using annual amounts for simplicity, you will see our person ending up 47 years from now with a balance in that
personal account of right at $250,000. Had he stuck the money into his mattress instead, it would have only been $65,800.
Had he invested an equal amount of money each year, on his own, in "safe investments" such as Certificates of Deposit
he would earn a similar sum, depending on interest rates. At $5 a pack, $1,400 would buy 280 packs of cigarettes per year, or less than a pack a day.
(emphasis added)
PRESIDENT BUSH: “ ...
Let me conclude by this thought: Investors aren't just Wall Street people, as far as I'm concerned. You've got the investor class. If you think about that, that means only certain people are capable of investing. I disagree. I think every citizen – every citizen – has got the capacity to manage his or her own money. And if they don't, we'll help them understand how to, and the rules will be such that they can. And I believe the so-called investor class ought to be every American, regardless of his or her background. ...”
“... In 2003, there were about 3.3 workers for every OASDI beneficiary. The baby-boom generation will have largely retired by 2030,
and the projected ratio of workers to beneficiaries will be only 2.2 at that time. Thereafter, the number of workers per beneficiary
will slowly decline, and the OASDI cost rate will continue to increase. ...”
“... Each year we wait costs an additional $600 billion, which will continue to rise. The longer we wait to take action, the more difficult and expensive the changes will be ...”
The President used identical language in his February 10, 2005 speech in North Carolina.
The $600 billion figure used by the President above, appears in a speech given by Office of Management and Budget Director Joshua Bolten in a speech to the U.S. Chamber of Commerce in Washington, D.C.
on January 14, 2005. Bolten cited the Social Security trustees as the source .
Bolten explained,
“... This figure is easy enough to understand. If you owe a debt, and you pay no interest on the debt for a year, the amount you owe grows by the interest you failed to pay. ...”
Click here to see the Trustee's explanation of the $10.4 trillion as future unfunded debt under a pay-as-you-go system.
COMMENT [NEW] : [This author failed to find mention of $600 billion in the 2004 Trustee's Report, but did not search it for "$0.6 trillion." On March 16, 2005
op-ed columnist Paul Krugman found this figure and challenged the interpretation placed on it by the White House in the New York Times ] . Krugman referenced p.58 of the Trustee's Report, which is reported
below as a new addition to this page; click here .
“... The Social Security tax income surplus in 2004 is projected to be more than offset by the shortfall in tax and premium income for Medicare, resulting in a small overall cash shortfall that must be covered by transfers from general fund revenues. This combined shortfall is projected to grow each year–such that by 2018 net revenue flows from the general fund to the trust funds will total $577 billion, or 2.6 percent of GDP. Since neither the interest paid on the Treasury bonds held in the HI and OASDI Trust Funds, nor their redemption, provides any net new income to the Treasury, the full amount of the required Treasury payments to these trust funds must be financed by increased taxation, increased Federal borrowing and debt, and/or a reduction in other government expenditures. Thus, these payments–along with the 75-percent general fund revenue contributions to SMI–will add greatly to pressures on Federal general fund revenues much sooner than is generally appreciated. ...”
“... Costs for both programs increase teeply between 2010 and 2030 because the number of people receiving benefits will increase rapidly as the large "baby-boom" generation retires. Thereafter, Social Security costs grow slowly due primarily to projected increasing life expectancy. Medicare costs continue to grow rapidly due to expected increases in the use and cost of health care. In particular, continuing development and use of new technology is expected to cause per capita health care expenditures to continue to grow faster in the long term, as they have in the past, than the economy as a whole.
“... Thus, a good way to view the projected cost of Social Security and Medicare is in relation to gross domestic product (GDP), the most frequently used measure of the total U.S. economy (Chart B below). Social Security outgo amounted to 4.3 percent of GDP in 2003 and is projected to increase by just over one-half to 6.6 percent of GDP in 2078. Medicare's cost was smaller in 2003, 2.6 percent of GDP, but is projected to grow more than fivefold to 13.8 percent of GDP in 2078, when it will be more than twice Social Security's.. ...”
“... Because any projection of future experience is uncertain, the Trustees use three alternative sets of assumptions to show a range of possible outcomes. The intermediate set of assumptions, designated as alternative II, reflects the Trustees' best estimate of the trust funds' future financial outlook; the low cost alternative I is more optimistic, and the high cost alternative III more pessimistic. As a further illustration of the uncertainty associated with projections, this report includes a stochastic, or probabilistic, projection that provides a distribution of possible outcomes around the intermediate case. This projection is described in some detail in appendix E . ...”
Fed Chairman Alan Greenspan
“... The choice of the tax base and other provisions of the code must also be taken in light of coming demographic changes. I believe that, as the baby boom generation begins to retire in a few years, it will become increasingly important for the nation to boost resources available in the future through greater national saving and enhanced incentives for participation in the labor force. The tax system has the potential to contribute importantly to those goals, and, at a minimum, tax reform should not hinder the achievement of those objectives. ...”
Rederal Reserve Governor Edward M. Gramlich
“... the nation's low national saving rate, basically the share of our output that is devoted to building up the country. This share can be defined either as the share of output not consumed either by households or government, or as the share of output devoted to capital investment less the share represented by borrowing from foreigners. The last clause is important–high investment is a good thing, but if much of this investment is financed by borrowing from foreigners rather than by our own saving, there could be trouble spots down the road. ...
“... If a nation wants to have its investment and not pay increasing shares of income in interest or dividends, it has to finance this investment by its own national saving. Or, turning the equation around, high national saving will raise future living standards whether it finances investment directly or reduces international borrowing.
“... As is well known, the population of the United States is aging, and in a few decades a much larger share of the population will be in its retirement years, drawing on both Social Security and Medicare. The share of output devoted to these two programs will rise rapidly, putting even further downward pressure on national saving rates. The trends, especially for Medicare, are so alarming that these two programs alone could, in the space of little more than a decade, account for about half of federal spending. Changes have to be made in these large entitlement programs to avoid a real fiscal disaster ...”
(from PDF file, page 6)
3 mentions of Social Security: (1) that proposed changes are not reflected in the budget (page 6, quoted below); (2) chart shoing Social Security expenditures from 2004 until period 2005 -2010 (page 10); and (3) that payment controls will be tighter (page 31)
“... Social Security spending would total $540 billion in 2006, an increase of $23 billion over 2005 or 4.9 percent. Social Security spending will grow to $665 billion for 2010, an annual average growth rate of 5.2 percent. The president's budget does not reflect any proposal to change the operation of the Social Security program. ...”
Office of Management and Budget Director Joshua Bolten stated that “... The Social Security system operates on a 'pay-as-you-go' basis, where the payroll taxes of current workers are used to pay for the benefits of current retirees. ...” [Comment: This method of
funding a retirement benefit program contrasts with a funded program such as an insurance annuity or a pension plan.] Later in the same speech, Bolten says:
“... The picture is not pretty. The Social Security Trustees have estimated that the current system owes more than $10 trillion more than it can afford to pay. ...”
Bolten states: “... Until about three decades ago, the Social Security system was no different than most private employer pension systems. These 'defined benefit' plans promised retirees and other beneficiaries a certain income level, no matter what. ...[M]ost companies have shifted to 'defined contribution' plans like 401 (k)s. Meanwhile, Social Security has stood still. ...”
To come: comparison of definied benefit plans, defined contribution plans and pay as-you-go as at Social Security.
“... For the Social Security benefits to be adequately financed for the infinite future, the contributions or benefits of current and future participants in the system must be adjusted to fully offset the shortfall due to past and current participants. Future participants, as a whole, are projected to pay, in present value, taxes that are approximately $0.8 trillion more than the cost of providing benefits they are scheduled to receive over the infinite future. Thus, the remaining long run financing gap that program reforms must ultimately close is $10.4 trillion in present value. This can be achieved by raising additional revenue or reducing benefits (or some combination) for current and future participants so that the present value of the additional revenue or reduced benefits for the infinite future equals $10.4 trillion. ...”
“... I. Will Social Security be "bankrupt" by 2042?
“Yes. Bankrupt means "having insufficient assets to cover one's debts,"1 which applies to Social Security in 2042, according to the Social Security Trustees most recent report. (footnote in original to: Social Security Trustees Report, page 3)
Beginning in 2042, the Social Security Trust Fund will be exhausted. At that point, the resources available to the system (payroll taxes plus some income taxes on Social Security benefits), will be insufficient to cover the liabilities of the system (benefits scheduled for retirees, people with disabilities, and other beneficiaries). If nothing is done to correct this problem, benefit payments would have to be reduced by roughly 27 percent. ...”
(Convened by the Department of Labor under the SAVER Act of 1997 and co-hosted by White House and Congress)
CHAIRMAN GREENSPAN: “... a few words on Social Security. Although the program replicates a private retirement annuity program in many ways, it is also quite different in several respects.
“It requires contributions of workers, matched by those of employers. But unlike a privately funded annuity program, the tie between contributions and benefits deliberately is not tight at the individual level.
“If the Social Security trust fund is depleted, the law requires that benefits be paid only to the extent that they can be financed out of the current payroll tax receipts. But I cannot imagine a viable political scenario in which full payment of benefits will not be forthcoming. Does anyone doubt that Congress would prevent benefits from being curtailed if the trust fund were depleted?
“In addressing the impending retirement of those born just after World War II, we will need to consider whether Social Security should better align itself with the funding provisions of our private pension and annuity system. Policymakers need to consider these issues now if we are to ensure a comfortable retirement for the post-war generation, while at the same time according due consideration to the needs of the later generations that now make up our workforce. ...”
The text of this speech may also be accessed at http://www.federal reserve.gov/boarddocs/speeches/2002/20020228/defau lt.htm .
The Department of Labor offers this paper, written in 1998, which focuses on the implications for disabled workers and the families of deceased workers of a shift from defined benefits to defined contributions for Social Security. While the paper states at the outset that it does not represent the official position
of the Department of Labor, it is featured on the DOL website.
“... Proposals to "privatize" Social Security would substitute individual savings accounts for all or part of traditional Social Security benefits. The individual accounts are designed for retirement. Traditional Social Security also provides disability benefits and survivor benefits to families of workers who die before retirement. They are based on the same formula used for retirement benefits. Thus, any privatization plan needs to take account of how it would apply to disabled workers and families of workers who die before retirement. The benefit design issues are important because they would affect significant numbers of workers and their families. ...”
Read this report online
[From numbered page 18 through 20 of the PDF report, found on PDF pp. 24-26]
“... In previous reports, the Social Security Advisory Board has pointed out that there are many options for how the program can be brought back into long-run
financial solvency. Among the many proposals that might, in some combination, be part of a plan to address the issue are:
increasing Social Security revenues through rate increases, increasing the amount of wages subject to Social Security taxes, or expanding program coverage
to all new State and local government employees;
decreasing benefit costs through any if a variety of optinos such as reduced cost-of-living increases, modifications to the Social Security benefit formula and
computation rules, increasing the Normal Retirement Age, or limiting benefits for higher income persons;
changing the program and its financing in other ways such as investing trust fund reserves in equities, replacing part or all of Social Security with individual
accounts on a mandatory or voluntary basis, or using general revenues to meet a part of program costs.
...
The experiences of 1977 and 1983 are instructive. In part because the program was operating then on more of a pay-as-you-go basis without a large reserve
account, there was less time available to mplement changes in advance of the point where there would be insufficient financing to meet benefit obligations. Even
though the size of the projected shortfall was smaller in both of these cases, the necessity for quick action left limited options for a gradual phase-in. In 1977,
Congress found it necessary to change the method for indexing the benefit formula because the method that had been adopted in the early 1970s interacted with
economic conditions in a way that Congress and other policymakers had not anticipated. This created large deficits that would have exhausted the disability
insurance trust funds by 1979 and the retirement fund by 1983 Because there was insufficiant lead time, Congress did not have the option of adopting a gradual
transition but instead approved a change in the benefit formula that significantly reduced benefits payable to individuals that were within just a few years of
retirement and may have based their plans on the earlier formula.
In 1983, Congress found it necesary to address Social Security financing in a context where inability to meet benefit obligations was imminent. It adopted a number
of provisions that had the effect of reducing benefits. Some of these provisions, such as the increase in the Normal Retirement Age from 65 to 67 years were deferred
and gradually phased in, but others, such as the permanent deferral of a scheduled cost-of-living increase, became effective immediately and reduced anticipated
benefits for everyone including those already receiving Social Security. ...”
In 1962, Social Security, private and government employee pensions, income from assets, and earnings made up only 84% of the total income of the aged, compared with 97% in 2001. Social Security benefits–the most common source of income in 1962–are now almost universal. The proportion of the aged population with asset income–the next most common source–has seen a modest increase. Over the 39-year period, receipt of private pensions has tripled, and receipt of government pensions has increased by over 50%. A smaller proportion of couples and nonmarried persons aged 65 or older received earnings in 2001 than in 1962.
CHAIRMAN GREENSPAN: ... [S]hort of a far more general reform of the system, there are a number of initiatives, at a minimum, that should be addressed. As I argued at length during the Social Security Commission deliberations of 1983, with only modest effect, some delaying of the age of eligibility for retirement benefits is becoming increasingly pressing. For example, adjusting the full-benefits retirement age further to keep pace with increases in life expectancy in a way that would keep the ratio of retirement years to expected life span approximately constant would significantly narrow the funding gap. Such an initiative would become easier to implement as fewer and fewer of our older citizens retire from physically arduous work. Hopefully, other modifications to social security, such as improved cost-of-living indexing, will be instituted.
The newest SSA Trustee figures are now being cited in President Bush's social security speeches
(emphasis added as underlined text, and links to glossary terms or other docs are emphasized in bold sans-serif type)
PRESIDENT BUSH: ... Let me talk about Social Security. I'm talking about Social Security because I see a problem, and I believe the job of the President is to confront problems and not pass them on to future Presidents or future Congress. That's what I think you elected me for. (Applause.)
First, I agree with Chuck when he said that Franklin Roosevelt did a good thing in creating the Social Security system. Social Security has worked for a lot of people. It has provided a safety net for a lot of citizens. The problem is, there's a hole in the safety net for a generation which is coming up, and let me tell you why. Let me – I'll just put it in personal terms. There's a lot of people like me getting ready to retire. We're called baby boomers. I turn 62 in 2008. It's a convenient year for me to retire, by the way. (Laughter.) We are living longer than the previous generation. We have been promised more benefits than the previous generation. See, people ran for office saying, vote for me, I'm going to give you more benefits if you put me in. So you've got a lot of baby boomers getting ready to retire who will be living longer years and promised more benefits. That's part of the math. The other part of the math is that there are fewer workers paying for people like me.
In 1950, there were 16 workers paying into the system for every beneficiary, so you can see the load wasn't that heavy. Today, it's 3.3 workers for every beneficiary . Soon, it's going to be 2 workers. If you're a younger person going to community college here, you're going to have to pay a lot of money out of your pocket to make sure I get the benefits I'm promised unless we do something different.
So the math has changed. The system is an important system, but it's got a hole in the safety net. I say, the hole in the safety net for the younger workers because if you're somebody who's retired or near retired, somebody born prior to 1950, you don't have a thing to worry about. The promise will be kept. ... (Applause.)
When the math has changed like it is, the system starts going in the red pretty quickly. In 20 – 2017, there's going to be more money going out than coming in for Social Security. By the way, we don't have a trust in Social Security . It's called, pay-as-you-go . See, some people think there's a Social Security trust where we've taken your money, and we've held it for you, and then when you retire, we give it back to you. No, what happens is we take your money, we pay money out for the promises for those people who have retired, and if we've got anything left over, we spend it on things other than Social Security . That's just the way it works. It's been working that way for a long period of time. And what's left are a pile of IOUs , paper.
Now, as a pay-as-you-go system , when you've got a lot of people like me retiring, getting bigger benefits, living longer, with fewer people paying in, pretty soon the system goes into the red . And it does in 2017. And every year thereafter, the situation gets worse, and worse, and worse. To give you an example, in 2027, the government is going to have to come up with $200 billion more than that which is coming in in payroll taxes just to make the promises.
So you can see from that chart there, the situation in 2017 gets bad, and it gets worse. Don't take my word for it. Take the word of the Social Security trustees. They issued a report recently . It said the situation is worse than we thought. In 2017, the system starts to go in the red ; worse every year after. And the longer we wait, the harder it's going to be for a younger workers to make up the difference.
So this is a generational issue. It's an issue that affects not those of you who have retired, but it affects your children and your grandchildren. And the fundamental question is, do we have the will in Washington, D.C. to take on the tough problems?
... In 1983, Tip O'Neill, Ronald Reagan, Bob Dole said, we've got a problem, let's see if we can't fix it. And they put together a 75-year fix, they said. First of all, I appreciate the spirit of Republicans and Democrats coming together. But it wasn't a 75-year fix. This was 1953. We're only in 2005. It wasn't a 75-year fix. If it was a 75-year fix, I wouldn't be sitting here talking about it. Now is the time, if we're going to come to the table, to do so and fix it permanently.
... [W]e ought to allow younger workers to set aside some of their own money in a personal savings account as part of the Social Security; in other words, a voluntary program that says you should be allowed to take some of your own money – after all, it is your payroll tax – and put it aside in an account of bonds and stocks. That's what you ought to be allowed to do.
Now, this doesn't fix the system permanently, but it makes the system a better deal for younger workers, and I'll tell you why. First a conservative mix of bonds and stocks earns a better rate of return on your money than the money that's being held in the Social Security – by the government. And that's important for people to understand. (Applause.)
And as that money earns, it is a compounding rate of interest. It grows. For example, you take a worker making $35,000 over his or her lifetime, and say, for example, a third of the payroll taxes, or 4 percent, were allowed to go into a personal savings account, that the nest egg that person would own over time in a conservative mix of bonds and stocks would grow to $250,000, see. That would be a nice part of a retirement package. There will be a Social Security system that the government is going to pay you benefits. I can't pay you how much until we get people together to the table. But it will be augmented – your Social Security plan, your benefits will be augmented by the money coming out of your own account. In other words, money grows if you hold it over time. It's not growing right now at a significant enough rate. It will grow if you're able to save it.
Secondly, I like the idea of people owning something. I want more people owning something, not fewer people. There's this kind of notion that this investor class in America only applies to a certain group of people. That's not what I think. I think the more investors we have, the more owners we have in America, the better off America is. And I want to see ownership spread throughout all our society. (Applause.)
I like the idea of someone working their lifetime building a nest egg they call their own and passing it on to whomever they want. That ought to be – that idea ought to be available to people from all walks of life. I like the idea of having a plan to help somebody whose spouse may have died prior to retirement. Think about the Social Security system today. If you're a – been working 30 years, started at age 21, and you're 51 years old and you pass away, and you still – and you've got a wife or a husband, the money in the system – the wife or husband doesn't get any of the money until he or she retires. And then, if he or she happens to be working, he or she only gets – only gets the higher of that which the Social Security will pay for him or her or the spouse, but not both. So you've got somebody who's worked their life, contributed to the Social Security system, died early, didn't get one dime of retirement, and the money just goes away.
... And finally, I don't know if you know this or not, but we have, at the federal level, what's called a Thrift Savings Plan. In other words, this idea has already been used by federal employees. Members of Congress, members of the Senate are allowed to set aside some of their own money in a conservative mix of bonds and stocks so they get a better rate of return. Now, in other words, this is – we're not inventing something new. For example, federal employees can't take their money and put it in the lottery, or you can't take it to the racetrack. In other words, there's a prescribed way – a mix of bonds and stocks that is – that will allow you to get a better rate of return than your money in the system, without taking extraordinary risks.
In other words, there's go-bys, there's guidelines. And it's already happening. Doesn't it make sense for members of Congress to give younger workers the opportunity to do the same thing with their money that they get to do in their retirement system? Frankly, if it's good enough for federal workers and elected officials, putting aside some of your own money in a personal savings account, it ought to be good enough for all workers in America.
So that's my thinking on the subject. I've got some other people up here been thinking about it, too, and I'm going to start with Jeff Brown, Dr. Jeff Brown, Ph.D. Isn't that right?
DR. BROWN: That is correct, sir.
THE PRESIDENT: So you are now a –
DR. BROWN: Professor. I'm a professor at the University of Illinois. (Applause.) All right. Wouldn't think I was in Hawkeye country here. (Laughter.)
THE PRESIDENT: Big Ten country. (Laughter.) Certain kind of loyalty throughout the conference.
DR. BROWN: And I've been studying Social Security now for about ten years.
THE PRESIDENT: I like to remind people, by the way, he's one of my – he's an advisor. So for the students here, take heart in this concept. He gets a Ph.D. I get Cs. (Laughter.) I'm the President and he's the advisor. (Applause.)
DR. BROWN: All those years of education.
THE PRESIDENT: That's right. Keep rolling. You studied the issue.
DR. BROWN: Yes, so, you're absolutely right that Social Security faces very severe financial problems, and they start very soon, just about 12 years from now. Really they start earlier, three years from now when the baby boomers start to retire and those surpluses that we're running start to dwindle down. Then they turn to deficits a few years later.
* * * * * [sic]
THE PRESIDENT: Yes, it's estimated, for example – if you're a younger person, listen carefully – that if nothing happens, if we wait and delay, if it's kind of the typical political response, just wait to the – you know, wait until 2017 to call people together, that in order to make sure that the system works, that your payroll taxes are going to [sic] 12.4 percent to 18 percent. Try that on, if you're working. That's not – by the way, that doesn't include federal income taxes, state taxes and local taxes. And so now is the time – I think what Jeff is saying, now is the time for us to deal with this problem. Now, again, I want to repeat, there's a couple of things about personal accounts that I think is important. One, it's just an optional plan. Shouldn't we give people the option of making the decision themselves? (Applause.) That seems like a reasonable approach for government. Doesn't it say – doesn't it make sense for government, people of both political parties to say, if you think you can do a better job than we can with your money, here's an opportunity to do so. It's voluntary. I happen to be a person who actually trusts people. It's your money; I trust you with your own money. To me that's an attitude that Congress ought to take: We trust you with your own money. (Applause.) Is that it, Professor? You did a fine job, as usual.
. . .
THE PRESIDENT: ... And we're going to end up here with Chuck Knudsen. Welcome.
MR. KNUDSEN: My name is Chris Knudsen.
THE PRESIDENT: Yes – I was thinking about your brother, Chuck. (Laughter.)
MR. KNUDSEN: That's my dad, Chuck, actually.
THE PRESIDENT: Chuck.
MR. KNUDSEN: And he's over here with –
THE PRESIDENT: Where is Chuck? Where are you? Oh, you had a terrible seat.
MR. KNUDSEN: He's over there somewhere.
THE PRESIDENT: I'm actually here with Chuck's son, Chris.
MR. KNUDSEN: It's a pleasure to be here today.
THE PRESIDENT: You're a student here?
MR. KNUDSEN: I am a student here. I'm 20 years old. I'm a sophomore here at Kirkwood Community College ... One of the finest community colleges in the nation. (Applause.)
THE PRESIDENT: There's a man looking for an A, right there. Good. Twenty years old?
MR. KNUDSEN: Twenty years old.
THE PRESIDENT: Yes, and so here you are talking to the President about Social Security.
MR. KNUDSEN: I am.
THE PRESIDENT: Why?
MR. KNUDSEN: Why? Because my time outside of school is pretty much split between church and Scouts. I'm an elder in the First Presbyterian Church of Marion.
THE PRESIDENT: Fabulous. ...
THE PRESIDENT: Setting a good example. What's that got to do with Social Security?
MR. KNUDSEN: Well, the last six summers I've worked at a Scout camp. I get a small check. ... but I do see the Social Security and the taxes taken off the top... . And I tend to wonder where exactly it's going.
THE PRESIDENT: Yes. Interesting question, isn't it? ... I'll tell you where it's going. See that red right there, that's where it's going – unless we do something about it right now. ...
It's interesting – when I was 20 years old, ... I don't remember ... wondering whether or not the Social Security system was solvent, because we thought it was, didn't we?
MR. KNUDSEN: ... I see what the future of Social Security is, and I start to wonder if, when I become 62, if the money is going to be there for me. The way the system is set up now, it's not going to be.
THE PRESIDENT: Well, I appreciate that. You know, there's a survey of people Chris's age – not Chuck's age, Chris's age – that said they are more likely to see a UFO than get a Social Security check. (Laughter.)
MR. KNUDSEN: The way the system is set up, I tend to believe that.
THE PRESIDENT: Yes. You know what's interesting about this younger generation of folks is that the investment culture has changed, if you think about it – 401(k), IRAs, those didn't exist when we were growing up. People weren't used to have incentives to invest their own money. But it's changed. All through society, people are learning to invest their money. The system is designed for plans where people can watch and manage their own money. That's what's changed in our society, hasn't it?
MR. KNUDSEN: I'd like to have the option to spend my money the way I would like to invest it.
THE PRESIDENT: Yes.
MR. KNUDSEN: I've been able to, through my dad, he showed me – kept me up to date on the family finances and things like that. And I feel that if I had some options with my own money, I could spend it wiser for myself than the government has with Social Security.
THE PRESIDENT: Yes, invest it wiser. So you won't be spending it until you retire.
MR. KNUDSEN: Exactly.
THE PRESIDENT: In other words, it's very important for people to understand, the nest egg you own is for – is to be a part of a retirement system. In other words, the government is going to be able to afford something, and on top of that will be your own nest egg. It's a part of the retirement system. And that asset base that you build will not only help you in retirement, but if you so choose, you can leave it to whomever you want, which is, I think, a vital part of having a vibrant society, that assets are passed from one generation to the next. (Applause.)
Good job.
MR. KNUDSEN: Thank you.
THE PRESIDENT: You want to have the final word or you want me to?
MR. KNUDSEN: I can go ahead and talk a little more if you would like. (Laughter.) I think the other key thing that most people are forgetting is the fact that if I felt that I wasn't wise enough to invest my money and I wasn't confident in myself, I have the option not to accept the personal account and leave the system as it is and take the system. So I have the option of doing it if I care to or not.
THE PRESIDENT: Precisely right. I appreciate you understanding that. I got the final word. (Laughter.)
MR. KNUDSEN: Okay.
THE PRESIDENT: First of all, I want to thank our panelists for joining us. I hope you found this to be an educational discussion about a problem that we need to solve now. If you're over 55 years old, you'll get your check. I don't care what the propaganda says, I don't care what the pamphleteers say, I don't care what the ads say, you will get your check. Now, if you're a younger person here at this fine community college,
you need to be asking the people in the United – you don't have to worry about your Senator and Congressman, but you need to be a part of people saying, we have a problem, you all got elected for a reason, now, what are you going to do about it to make sure the Social Security system is permanently solved. (Applause.)
Thanks for coming today. I appreciate your time. God bless. (Applause.)
Graph of OASDI Expenditures since 1937
Spreadsheet prepared by Leslie Grey Harper from the "Expenditures" column of SSA's Tru st Fund Operations Chart
for OASI and OASDI. The dollar amounts are nominal dollars, not adjusted. Social Security made only lump sum refund payments to taxpayers until December 31, 1937. The first qualified
beneficiaries began receiving monthly checks in 1940, and gradually the number of beneficiaries eligible to receive payments began to build up.
The year 1950, selected by the White House to use as in comparing the number of beneficiaries per worker over time, was only 10 years from the beginning of the
monthly benefit stream, before sufficient beneficiary payments were being made for it to lie on the same leg of the "curve" of the graph as the bulk of payments to beneficiaries.
The current trend line for expenditures by Social Security for benefit payments turned upward in about 1970, 30 years after the program's monthly payments began at January 1, 1940, and 30 years after people had begun retiring and joining
the ranks of social security recipients.
Remarks at the Spring 2005 Banking and Finance Lecture, Widener University, Chester, Pennsylvania
Proposals include one that "raises the retirement age three months every two years, or 1.25 years every decade, and taxes all wages for both Social Security and Medicare."
Mr. Gramlich cites the experience of countries such as Italy and Japan where the ratio of workers versus retirees is expected to drop "to less than 1"
GOVERNOR GRAMLICH: Population aging is a worldwide phenomenon. In this country the looming retirement of the baby boom generation will take the United States ratio of workers to retirees from 3.3 today to 2 in about thirty years. Around the world, under present policies and demographic trends, the ratio of workers to retirees is likely to fall to less than 2 for countries as diverse as
Demographic movements of this magnitude will require significant policy changes. The public costs of retirement systems will rise markedly unless countries raise their age of eligibility for retirement program benefits or cut these benefits. Moreover, small tax increases or benefit cuts will not do the job–the implicit actuarial deficits of these programs are so large that halfway measures will not be adequate.
The United States is in relatively good shape by international standards. In contrast to other countries, the United States birth rate is not far below the rate that stabilizes population levels, and the tax rates necessary to finance our main retirement programs, Social Security and Medicare, are relatively low. But while the present situation of the United States may not be alarming, the outlook comes closer to being so. Outlays are projected to rise slightly more than program revenues for Social Security and much more than program revenues for Medicare. The recent annual report of the trustees of Social Security and Medicare projected rapid deterioration in the trust funds financing both programs, with the Medicare fund being exhausted in fifteen years. Their implication was that substantial tax increases or benefit cuts would be necessary to put both programs in long-term actuarial balance.
What should we do to ensure the viability of Social Security and Medicare? Disaster is not imminent, but it seems pretty clear that in the not too distant future the United States, too, will have to confront some distinctly unpleasant policy choices. In this talk, I want to anticipate some of these choices. Up to now, discussions of Social Security and Medicare have been fragmented–there are a sizable number of proposals to reform Social Security, a few to reform Medicare, and none to unify the reforms for both programs. I will propose a joint approach that treats both programs alike and applies to them the same retirement ages and tax arrangements. This joint proposal fully corrects the long-term actuarial deficit for Social Security and would also make a start on a solution for Medicare.
The Trustees' Report
Programs such as Social Security and Medicare could in principle be funded in many ways. But the tradition here, and in many other countries, has been to tie these public, defined benefit programs to a trust fund, with the revenues coming mainly from dedicated payroll taxes levied on employers and employees. To economists, the exact split between employers and employees is immaterial, because even the employer share is likely to be shifted back to employees in the form of reduced wages. The trust funds have been financed basically on a pay-as-you-go basis, though it would certainly be possible to pre-fund benefits through accumulations in advance of later spending. To some extent this has been done for Social Security by reforms made in the 1980s. At that time, the retirement of the large baby boom population was anticipated, and payroll tax revenues were accumulated in advance of benefit payments, steps that created the present-day cash surpluses for the Social Security component of the overall federal budget.
The Social Security retirement program began seventy years ago, and disability insurance was added fifty years ago. The combined expenses are financed by the Old Age, Survivors, and Disability Insurance (OASDI) Trust Funds. Medicare programs were added forty years ago. Part A of Medicare, covering hospital insurance is financed, just like Social Security, out of a payroll tax and trust fund. Part B, covering physician and outpatient costs, is optional, with about one-fourth of the costs financed by premiums paid by those who participate in the program and the remainder by general revenues. Part D, covering drug costs, was added last year and is also optional, financed by participants, general revenues, and some state contributions.
To measure the adequacy of long-term financing, the four government trustees of the Social Security and Medicare trust funds convene every March with two outside members to review the projections. The actuaries make a number of long-term projections for life expectancy, birth rates, economic growth variables, prices, in general as well as specifically for health care; they then compute the expected actuarial situation for the trust funds for both programs. In recent years these projections have been made for seventy-five years, a horizon that seems long but in some sense is really not long enough. Because trust fund outlays are running well ahead of tax inflows by the end of the forecast period, the mere passage of time throws these seventy-five-year forecasts out of actuarial balance. To correct this tendency, the actuaries now provide forecasts that show costs if the ratio of trust fund assets to outlays is stable in the eighth decade out. This adjustment provides a reasonable approximation to the tax rates necessary to balance the system in perpetuity.
The flow results for these projections, using the trustees' intermediate assumptions, are given in figure 1
The pattern is qualitatively similar for the portion of Medicare financed by the payroll tax–Part A, or the hospital insurance (HI) portion. However, the outlay rates for Part A rise more steeply because of the rising relative costs of health care.
Flow numbers are flow numbers, and given the steep inclines of at least some of the outlay rates, it makes sense to switch over to present values of liabilities, as shown in table 1
For Medicare, the initial size of the program is much smaller, but the outlay increases are larger, and the unfunded liabilities are much larger. Part A, the hospital insurance component, has a seventy-five-year unfunded liability of $8.6 trillion, or 1.4 percent of discounted GDP, and an infinite-horizon liability of $24.1 trillion, 2.5 percent of discounted GDP.
It is more difficult to compute the liabilities for parts B and D because they have no dedicated trust funds. The gross expenditures for these programs, covering participant costs, general revenues, and state contributions, are $27.8 trillion (4.4 percent of GDP) over a seventy-five -year horizon or $58.0 trillion (6.1 percent of GDP) over an infinite horizon. Currently, participants and general revenues finance 1.3 percent of these costs (state payments under part D have not started yet). Hence, a reasonable estimate of the future unfunded liability is the difference–$19.8 trillion (3.1 percent of GDP) for seventy-five years or $45.8 trillion (4.8 percent of GDP) for the infinite horizon. And these humongous numbers do not even include Medicaid, which is financed entirely by general revenues and states, and also growing rapidly because of costs related to the aged.
Policy Approaches
Despite the fact that the long-term financial problem is far worse for Medicare than Social Security, most policy proposals have focused on Social Security. There are three reasons for this. One is that with numerous legislated and designated advisory councils, groups are forced to make Social Security proposals more often than Medicare proposals. Another reason is that the numbers are less daunting–it is hard enough to deal with unfunded liabilities of $11 trillion, but it is virtually impossible to deal with unfunded liabilities of $70 trillion. The third reason is that changes to Social Security just involve money–cutting benefits means cutting someone's defined-benefit pension payments. Cuts in Medicare, on the other hand, while partly mitigating financial burdens on the aged, could also involve the much more difficult question of limiting, or even rationing, health care treatments. Medicare cuts could be quite literally a life-and-death affair.
My idea on the tax side is relatively straightforward. Today, Medicare Part A is financed by a 2.9 percent combined payroll tax on all wages, and Social Security is financed by a combined 12.4 percent combined payroll tax on wages up to $90,000, a threshold that is increased each year with the growth in wages. One of my goals is to standardize treatment across the programs, and I would do that by removing the $90,000 cap on wages and salaries that are taxable for Social Security purposes. Let's treat both programs alike by taxing all wages for both programs. Will this represent a tax increase for Social Security? Of course it will, though in part the removal of the cap merely adjusts for the fact that because of the widening of the income distribution, substantially more wages are above the cap than in earlier times. But the main reason for removing the taxable payroll cap is that both programs together are woefully underfunded, and this would be a small step in the direction of fiscal responsibility.
As I will argue below, there is a good rationale for raising continuing to raise the NRA beyond age 67, but I also think we should raise the EEA at the same pace. There are two reasons:
As the NRA rises with no change in the EEA, the actuarial reductions get larger and larger. Pretty soon, benefit payments at the EEA get pretty low, and what we are thinking of as a retirement insurance program becomes progressively less so.
Because of shifting demographics, the country will just plain need more workers to pay for growing retirement costs. If all workers were perfectly rational in comparing benefits and costs, they could possibly decide for themselves when to retire. But study after study has shown that many workers seem to be highly myopic and retire at the first instant at which they are eligible for any money at all from Social Security. In such cases a reasonable policy response is to nudge workers in the direction of working longer careers by the simple expedient of moving the EEA up along with the NRA.
The next part of the age program is to keep the two ages common across both Social Security and Medicare. Confusion already exists because people qualify for full benefits under Medicare at age 65 and full benefits under Social Security at an age nearing 66. As the NRA increases for Social Security, the disparity will widen and the confusion will grow. So at the slowly rising NRA, I would give full benefits for both Social Security and Medicare. At the EEA, which would rise at the same slow rate as the NRA, I would give actuarially reduced benefits for Social Security and early buy-in opportunities for Medicare. One illustrative schedule is that individuals might be allowed to buy in to Medicare by paying, say, 90 percent of the average Medicare costs for parts A, B, and D once they hit the EEA, 60 percent a year later, 30 percent a year later, and only the standard part B and D premiums when they fully qualify for Medicare.
Tying the program conventions together has programmatic value, but these programs are different and one must proceed cautiously. Medicare is a health insurance program, and health insurance performs two functions–it mitigates financial loss for households getting treatment, and it permits households to get health treatment in the first place. To the extent that the latter motive is dominant, as it could be for low-income or disabled households, measures to raise the eligibility age could be problematic. For this reason, it would be important to provide a generous schedule of buy-in substitutes for households with low-income or disabled beneficiaries, to encourage greater use of health care in the years before the NRA. The subsidies could be offset by surcharges on the premiums for well-off households, who could more easily afford the buy-in.
Retirement Ages
The hardest question here is how rapidly to increase the basic retirement age, at which individuals qualify for full benefits under both programs. There are several ways of dealing with the question.
I begin with the underlying logic for a rising retirement age. Historically most workers contributing to Social Security have been males. Males in my grandparents' generation who were lucky enough to attain age 65 could be expected to live, and collect benefits, for another thirteen years. Males in my grandchildren's generation lucky enough to attain age 65 are projected to live another twenty years. Had the NRA not been raised, this factor alone would have made Social Security a better deal by almost 60 percent for the younger generation. Obviously there have been many other changes in society, the economy, and Social Security over this time. But, still, it is my guess is that if the designers of Social Security had known back in the 1930s that postwar life expectancies would increase so significantly, they would have built rising retirement ages into the system. Of course, when asked, people do not favor rising retirement ages. But given the various undesirable choices for moving these programs back toward actuarial soundness, a slowly rising retirement age seems far and away the fairest across generations.
One standard for how fast to raise the retirement age is to invoke life expectancies. Life expectancies at age 65 speak to the question of how many years into retirement individuals are likely to collect benefits. Life expectancies at age 20 address the question from a different perspective–as individuals enter adulthood, we might have them spend a constant percent of their time in work and retirement.
The age-65 standard shows that, for males born between 1875 and 1995, life expectancy at age 65 has increased 7.4 years, an average of 0.6 years every decade (table 2)
The age-20 proportionate standard works out as follows. In 1940, at the dawn of Social Security, 20-year-old males could expect to work another 45 years and to live just 1.9 more after retirement. That is, they could expect to spend 96 percent of their remaining life in the work force and 4 percent in retirement. Today, 20-year-old males can expect to live another 55.6 years. If they were to spend 96 percent of that time in the work force, the NRA would be slightly more than 73. By this standard, the NRA would have advanced 1.4 years every decade.
Health status is also relevant. One measure is the share of men near death, defined as being in the last two years of life. In 1960 this share, for men around today's Social Security early retirement age of 62, was about 6 percent (figure 2)
One can also consider a broader measure of health status. Since 1970 the National Health Interview Survey has asked a direct question about health status. Typically, the proportion of people describing their own health as fair or poor is taken as a measure of poor health status. Since the numbers bounce around, I have made comparisons with trend lines estimated by Cutler, Liebman, and Smyth (figure 3)
These health standards give varying estimates, so the conclusions are not as tight as for life expectancy. But they suggest that health standards are improving even more rapidly than life expectancies. If the retirement age were increased about a year per decade from the standpoint of life expectancy alone, the increase would be more rapid from the standpoint of health status. A sensible compromise would seem to be to raise the NRA and the EEA slightly more than a year every decade–maybe three months every two years–a pace slightly slower than the present rate of increase for the NRA. This rate of increase should be reviewed periodically to adjust to future changes in health status or life expectancy.
There is one final point. A standard argument against raising the retirement age is that people are working physically demanding jobs and are simply not able to continue. Of course, workers can and do switch careers as they age, or claim early retirement. But it still makes sense to look at the share in demanding jobs, as is done in table 3
It is not popular to raise the retirement age. Workers have a valid desire to consume some of their increasing productivity in the form of leisure time, or earlier retirement. At the same time, Social Security and Medicare together pose huge financial problems. It is also not popular to raise payroll taxes, or to ration health care. Among very unpleasant alternatives, raising the retirement age seems to be one of the fairest approaches across generations.
Budget Savings
Let's then take a policy change that raises the retirement age three months every two years, or 1.25 years every decade, and taxes all wages for both Social Security and Medicare. How does it stack up?
The tax change is easy to compute. Right now about 85 percent of wages are taxable and this coverage rate is slated to decline slightly over time. Applying the 12.4 percent tax rate to the15 percent of wages that are untaxed leads to an effective change based on now-taxable wages and salaries of 2.1 percentage points. This change more than solves the seventy-five-year Social Security problem (for the intermediate assumptions), and solves more than half of the infinite-horizon Social Security problem. It is only a first step, but a strong one.
Increasing the NRA by three months every two years would improve the actuarial balance of Social Security by slightly less than 1 percentage point of taxable wages and salaries. I ignore any cost-saving effect on Medicare, permitting the early buy-in costs for low-income households to use up any budget savings from higher premiums for high-income households whose primary breadwinner is just over 65. If we were to combine this increase in the retirement age with a few standard measures to improve the horizontal equity of Social Security–including all newly-hired state and local workers and using a chained price index–the total improvement reaches about 1.4 percentage points.
On net, the changes recommended here might improve the overall balance of Social Security plus Part A of Medicare by about 3.5 percentage points of taxable wages and salaries. These steps alone are enough to finance Social Security in perpetuity. Or, they could finance Social Security for seventy-five years and extend the life of Part A trust fund by about three decades. Huge general revenue liabilities for parts B and D of Medicare remain, but this package is still a start in dealing with growing retirement costs. As said above, the package of taxing all payrolls for Social Security and advancing the normal retirement age is indeed strong medicine.
My approach here has been to unify proposals for the financial reform of Social Security and Medicare on the tax side and for retirement ages. Will the changes be pleasant or popular? No. Will something like them, or worse, be necessary some day? Yes. We might as well begin now thinking about those changes that seem to be the fairest across generations.
* * *
Budget Savings
Let's then take a policy change that raises the retirement age three months every two years, or 1.25 years every decade, and taxes all wages for both Social Security and Medicare. How does it tack up?
The tax change is easy to compute. Right now about 85 percent of wages are taxable and this coverage rate is slated to decline slightly over time. Applying the 12.4 percent tax rate to the15 percent of wages that are untaxed leads to an effective change based on now-taxable wages and salaries of 2.1 percentage points. This change more than solves the seventy-five-year Social Security problem (for the intermediate assumptions), and solves more than half of the infinite-horizon Social Security problem. It is only a first step, but a strong one.
Increasing the NRA by three months every two years would improve the actuarial balance of Social Security by slightly less than 1 percentage point of taxable wages and salaries. I ignore any cost-saving effect on Medicare, permitting the early buy-in costs for low-income households to use up any budget savings from higher premiums for high-income households whose primary breadwinner is just over 65. If we were to combine this increase in the retirement age with a few standard measures to improve the horizontal equity of Social Security--including all newly-hired state and local workers and using a chained price index --the total improvement reaches about 1.4 percentage points.
Footnote
1. David Cutler, Jeffrey B. Liebman, and Seamus Smyth (forthcoming), "How Fast Should the Social Security Retirement Age Rise?"
Visit article to see 6 tables at the bottom .
Click to read. The National Commission on Social Security made 88 recommendations to Congress to strengthen Social Security and avert a crisis.
[GALVESTON, TEXAS, April 26, 2005]
Comment: President Bush Visited Galveston, Texas To Meet With Local
Public Employees Who Are Saving For Their Retirement Outside Of Social
Security In Personal Accounts. The President has called for allowing
younger Americans the option of safely investing a portion of their
payroll taxes in voluntary personal accounts that they own and control
within the Social Security system:
Background: Five Million People Nationwide Are Outside Of Social
Security
All Full-Time Galveston Public Employees Are Saving For Their
Retirement Outside Of The Social Security System. Across Texas,
forty-nine percent of all state and local public employees are exempt
from Social Security and participate in alternate retirement systems.
Galveston's Alternate Retirement System Features Personal Accounts.
All full-time public employees of Galveston County, including elected
officials, pay into personal accounts instead of the Social Security
system. Galveston County, along with nearby Brazoria and Matagorda
Counties, opted out of Social Security in the early 1980s. Millions of
other state and local public employees nationwide participate in plans
outside the system.Exempt Workers Also Have Ownership And Control. Galveston public
employees have ownership of their retirement income, which means they
can pass on their nest eggs to their children and do not face the risk
that the government will decide to cut their benefits.Galveston Public Employees Enjoy Higher Rates of Return.
Participants in Galveston's alternate system enjoy higher rates of
return on their contributions than they would under Social Security and
a minimum guaranteed rate of return.
[KIRTLAND, OHIO, April 15, 2005]
Today [April 15, 2005], President Bush Visited Kirtland, Ohio To Meet With State And Local Public Employees Who Are Outside Of Social Security And Have The Option Of Investing In Voluntary Personal Accounts. The President has called for allowing younger Americans the option of safely investing a portion of their payroll taxes in voluntary personal accounts that they own and control within the Social Security system.
Background: Five Million People Nationwide Are Outside Of Social Security
Nearly All Of Ohio's Public Employees Are Outside Of Social Security.
State And Local Public Employees Welcome Choice . Ninety-seven percent of Ohio’s public employees, or 846,000 workers, are exempt from Social Security. Millions of other state and local public employees nationwide participate in plans outside the system.Exempt Workers Have Flexibility . Public employees in Ohio have the option of choosing from several different retirement plans, including voluntary personal accounts. Right now, thousands of state employees elect voluntary personal accounts, and the percentage of people participating has been growing substantially since the accounts were introduced statewide in 2003.State And Local Public Employees Control Their Personal Accounts . Participants in voluntary personal accounts enjoy higher rates of return on their contributions and have ownership of their retirement income, which means they do not face the risk that the government will decide to cut their benefits. Ownership also means they can pass on their nest eggs to their children.
Millions Of Americans Already Have Retirement Plans Outside Social Security.
Many State And Local Public Employees Are Outside Of Social Security . There are approximately five million state and local public employees who are exempt from Social Security. They live in every state and participate in alternative retirement plans that offer additional opportunities to build savings for their retirement, including higher rates of return and greater flexibility.Federal Employees Were Exempt From Social Security Before Laws Changed . Prior to 1984, federal employees, including the President, Vice President, and members of Congress, were not required to pay Social Security payroll taxes. Federal Employees Already Have Voluntary Personal Accounts In Addition To Social Security . People who work for the federal government have the option of investing a portion of their income in a Thrift Savings Plan (TSP), which offers a conservative mix of stocks and bonds. The federal government offers this plan because it recognizes the benefits of voluntary personal accounts.
The President Has Laid Out Basic Principles That Must Guide Reform.
No Changes For Those Born Before 1950 . Those who are at or nearing retirement will see no changes to their Social Security benefits, but they too want to see the system strengthened for their children and grandchildren. The President welcomes the wisdom of seniors and their input on how to save Social Security for future generations.We Must Fix Social Security Permanently . The President wants to fix Social Security once and for all, so that our children and grandchildren do not face these same problems. No Increase In Payroll Tax Rates . Increasing the payroll tax rate would burden workers and harm our economic strength.Voluntary Personal Retirement Accounts Are A Key Component Of Reform . They would provide a nest egg to supplement the traditional Social Security checks workers receive.
TODAY'S PRESIDENTIAL ACTION
Today, President Bush Visited Northern Virginia To Meet With Younger Workers Who Are Concerned About The Future of Social Security. The President has called for allowing younger Americans the option of safely investing a portion of their payroll taxes in voluntary personal accounts that they own and control within the Social Security system.
BACKGROUND: YOUNGER WORKERS HAVE THE MOST TO GAIN FROM SOCIAL SECURITY REFORM
Younger Americans Face A Stark Reality.
There Is A Narrow Window To Fix Social Security For Today's Youth. In just three years, the first Baby Boomers will begin to retire, putting added strain on the system. In 2017, the system will begin
paying out more than it takes in. This will ultimately result in drastically higher taxes, reduced benefits, increased debt, or cuts to other critical government programs.The Government Has Borrowed $1.7 Trillion From The Social Security Trust Fund. The government has borrowed the total value of the Trust Fund to pay for other government spending. Beginning in 2017, the
government will have to begin backing up these paper promises with real money.A Permanent Solution Is Needed For Today's Youth. A band-aid solution of quick fixes and small tweaks will only pass this problem on to the next generation.
Younger Americans Support The President's Social Security Plan.
Younger People Have Little Faith In The Current Social Security
System. A recent national poll by Harvard University's Institute of
Politics (IOP) found seven out of ten American college students did not
believe Social Security would pay out benefits when they retire.Today's Younger Workers Want A Nest Egg. Younger workers have seen
how the government has used their Social Security taxes to fund other
programs, and they understand that voluntary personal accounts offer a
better way to fund Social Security. A recent Fox News poll found 84
percent of Americans ages 18 to 55 believe they should have the option
of creating a voluntary personal account within the Social Security
system.Younger Workers Already Belong To The Investor Class. Younger workers today are more familiar with investments than previous
generations. Through 401(k) plans offered by employers across the
country, workers know the power of compound interest and how their
contributions to these accounts can grow steadily over time.
The President Has Outlined Details To Guide The Legislative Process.
Future Generations Will Receive Benefits Equal To Or Greater Than
Today's Seniors. Under any plan to reform Social Security, future
generations should receive at least as much as seniors receive today.Protect Future Generations Who Depend on Social Security The Most.
Low-income workers should receive benefits that grow faster than
benefit increases for the wealthiest seniors, which would grow no
faster than the rate of inflation. This change alone would solve 70
percent of the funding problems facing Social Security.Replace The Empty Promises Being Made to Younger Workers With Real Money. Younger workers should have the option of putting a portion of their payroll taxes into a voluntary personal account. This nest egg will give workers an opportunity to receive a higher rate of return
than the current Social Security system can provide.The President Will Continue To Work With Congress. Social Security is too important to pass this problem on to the next generation. The President has committed to work with both the House and Senate in a bipartisan way.
(formatting changed to bullet points from Whitehouse site)
Today's Presidential Action:
Today In A Primetime News Conference, The President Laid Out His
Vision For Moving Forward With Bipartisan Social Security Reform. The
American people understand that Social Security is headed for serious
financial trouble and the President believes it is our duty to make
Social Security permanently solvent. The President also believes it is
our responsibility to improve the system by directing extra help to
those most in need and making it a better deal for younger workers.
As Congress Begins Work On Legislation, The President Outlined
Three Goals: ensure that future generations receive benefits equal to
or greater than today's seniors; protect those who depend on Social
Security the most; and replace the empty promises being made to younger
workers with real money.
The President Made Clear That Some Things Will Not Change. Seniors
and people with disabilities will continue to get their checks, and all
Americans born before 1950 will also receive their full benefits.
Background: A Reformed System that Strengthens Social Security For Those In Need
Future Generations Receive Benefits Equal To Or Greater Than
Today's Seniors. Under any plan to reform Social Security, future
generations should receive benefits equal to or greater than the
benefits that seniors receive today.
Millions Of Americans Depend On Social Security As A Primary Source
Of Income. As a matter of fairness, the fundamental promise of Social
Security must be kept.
Protect Future Generations Who Depend on Social Security The Most:
President Bush has made it clear that we must provide extra help to
those future seniors who need it most.
Benefits Should Grow Faster in the Future For Low-Income Workers
Than For Those Who Are Better Off. Under a reformed system, low-income
workers should receive benefits that grow faster than inflation. In
order to return the system to solvency, the benefit increases for
wealthier seniors should grow no faster than the rate of inflation.
This would be accomplished by adopting a sliding-scale benefit formula,
similar to the Pozen approach. Eliminate Poverty Among Future Seniors. Today, roughly two million retirees who paid into Social Security their whole lives are collecting benefits that leave them below the poverty line. The President
believes we should make good on a great national commitment: if you
work hard and pay into Social Security your entire life, you will not
retire into poverty. This Reform Would Solve Approximately 70 Percent Of The Funding
Problems Facing Social Security. A responsible, reasonable and
sustainable rate of benefit growth for wealthier seniors will help
return the system to fiscal balance and would enable us to help those
seniors in the greatest need.
Replace The Empty Promises Being Made to Younger Workers With Real
Money. Younger workers should have the option of putting a portion of
their payroll taxes into a voluntary personal account which will allow
them to build a nest egg that belongs to them. This money will give
workers an opportunity to receive a higher rate of return than the
current Social Security System can provide.
Voluntary Personal Accounts Should Include The Risk Free Option Of
Investing In Treasury Bonds. Voluntary personal accounts should
include an investment option that allows workers to invest in U.S.
Treasury bonds, which have no risk. Workers who have reservations
about investing in the markets will still be able to rely on a Social
Security check that is equal to or higher than today's retirees.
The President Will Continue To Work With Congress To Find A
Solution To Social Security That Is Sensible, Permanent And Fair.
Social Security is too important to pass this problem on to the next
generation. The President has committed to work with both the House
and Senate in a bipartisan way as they take the next steps in the
legislative process.
Prepared statement of Director Bovbjerg to be presented to the U.S. Senate Select Committee on Aging April 28, 2005 includes a prepared report by the GAO and charts to be presented at this hearing: "REDIFINING RETIREMENT: Options for Older Americans"
Click here to see Charts from this report .
(click charts to see PDF version of full Statement)
Regarding the interview reported [May 19, 2005] in the Congressional Quarterly
of Robert Pozen, a member of President Bush’s Social Security Commission who
designed the president’s proposal to cut Social Security benefits for more
than 70% of retirees, quoting Pozen as saying that ush should "back away" from his call for private accounts
and "I would advise the president to say that carve-out accounts are no longer required":
Representative Robert Menendez of New Jersey's 13th Congressional District and Chairman of the House Democratic Caucus, stated [May 19, 2005]:
"Even the architect of the President’s proposal to slash Social Security benefits for the middle class is now urging him to abandon his privatization plan.
When the chorus of opposition to privatization begins to include even the President’s own advisors, it is clear that a national consensus has been reached. The President should abandon his plan to transform Social Security from a guarantee to a gamble, and focus instead on real solutions to deal with the program’s long-term challenges."
Hear from Democrats, Republicans, AARP, factional websites and the press.