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4/21/2017

Will Social Security be there when I retire?


Social Security pays benefits directly from tax revenues, primarily from payroll taxes and to a much lesser extent from the income taxation of benefit payments. When tax revenues exceed the cost of paying benefits, the excess funds are used to purchased special-issue Treasury bonds which are accounted for in the Social Security Trust Fund. When benefit expenditures exceed tax revenues, then Social Security redeems some of the bonds in the trust fund to enable full payment of benefits. If benefit expenditures exceed revenue by a sufficient amount for a sufficient length of time, the trust fund reserves will be exhausted. At that point Social Security will still pay benefits, but only in the amount equal to its current tax revenues.

 

The first chart shows the average benefits that can be paid by Social Security for a set of hypothetical individuals with three different levels of career average earnings, measured in inflation adjusted dollars. Three important facts stand out. First, in all cases benefits will continue to be paid for the foreseeable future. Second, Social Security payments will fall dramatically sometime around 2035, as the trust fund reserves are exhausted, and tax revenues will only be sufficient to pay about 77 percent of what is currently scheduled by law. By 2090, revenues will only be sufficient to pay about 74 percent of the current law scheduled amount. Third, benefits tend to rise faster than inflation over time, that is because benefits are indexed to increases in economy-wide average wages. 


 

The next chart describes the long-term financial imbalances in the Social Security system. During prolonged periods in the past, income exceeds costs and positive balances were credited to the Social Security trust fund. Since 2010 and for the foreseeable future, the cost to pay scheduled benefits exceeds it tax income. In reality, the system cannot independently borrow funds to make up its annual deficits. Until roughly 2035, the bonds held in the trust fund will be redeemed to make up those deficits, but after the point of trust fund reserve exhaustion, the system’s cost will have to equal its income.  Annual balances will effectively be zero. As a whole the system will only be able to pay out about 77 percent of what is scheduled under current law. Under the normal legislative process, Congress has the ability to change the law to bring revenues and expenditures in balance, either by increasing revenues, decreasing benefits or a combination of the two.

 

The chart below expresses program costs and revenues as a percent of U.S. taxable payroll. The income rate is the ratio of non-interest revenue to taxable payroll, while the cost rate is ratio of program costs (benefits and administrative costs) to taxable payroll. The balance is the difference between the two. When the trust fund is exhausted, scheduled benefits would no longer be payable, and costs would fall to the same level as revenues (the income rate).

  

 

Those responsible for projecting the long-term financial status of the Social Security program have long known that under current tax rates and benefit levels, there would eventually be insufficient funding to pay for the level of benefits scheduled in current law. In 1985 — two years after the last major legislative effort to address long-term shortfalls in the systems finances — it was projected that there would be sufficient funds to last until 2050. A decade later the projection was far more pessimistic, with trust fund reserve exhaustion projected for 2031. Several years later, the expectation was revised to sometime in the mid to early 2040s. The Great Recession sharply reduced expected tax revenues and now the Social Security Trustees project reserve depletion of the Old Age and Survivors Insurance trust fund in 2035.

 

In the chart below, click in the legend to highlight the trust fund projection from a particular Trustees Report.

 

 

Under current law, the payroll tax rate and the tax base to which those payroll taxes apply is unchanged in the future. The main driver of financial imbalance in the system, therefore, is the rate of cost increase. Cost are increasing because the ratio of beneficiaries to covered workers, who provide the bulk over the system's revenues, is increasing. This in turn is largely due to demographic shifts, which are described in a past chart collection. The baby boom, followed by a sustained decline in births rate, has created an older society with more retirees collecting benefits relative to workers contributing taxes.