The big news this week is that the Social Security and Medicare trustees issued their annual reports detailing last year’s financial results and their 75-year projections. Here’s what Elaine Floyd has to say about the news:
Although the OAS (Old Age and Survivors) fund is legally separate from the DI (Disability Insurance) fund, the two funds are usually combined for the purpose of reporting actuarial results and projections. This year the distinction between the two is important due to surprisingly favorable results for DI. The OAS fund is due to run dry in 2034, after which it will be able to pay 77% in promised benefits. The DI fund will exhaust in 2052, after which it will be able to pay 91% of scheduled benefits. Last year, trustees reported that the DI fund would exhaust in 2032.
For the combined funds, the actuarial deficit came in at 2.78% of taxable payroll, down from 2.84% of taxable payroll in last year’s report, a slight improvement due to the better outlook for the DI fund. To remain solvent over the next 75 years: 1) payroll taxes would have to increase by 2.70 percentage points to 15.10%; 2) benefits would have to be cut by about 20%; or 3) some combination of these approaches would have to be adopted. Stating the solutions in this way—either tax increases or benefit cuts or a combination of the two—lends consistency to the report and facilitates comparisons from year to year. It does not mean that Social Security reform, when it happens, will be so cut and dried. For an example of a more nuanced reform proposal, see the actuaries’ analysis of the Social Security 2100 Act.
We must remember that a slight change in assumptions for economic growth, total population, life expectancy, and other economic or demographic data can, when compounded over the next 75 years, make a big difference in the ultimate performance of the trust funds. This is why we must never accept any one year’s report as gospel.
When considering these actuarial results, please remember that it uses the trust fund perspective. This is the accounting system under which Social Security is self-financed, with payroll taxes going into, and being paid out of, a dedicated trust fund. Any reference to the annual federal budget deficit is not relevant to this discussion. Anyone who talks about Social Security adding to the federal budget deficit (as noted in this WSJ article) is using the unified budget perspective. Under this perspective payroll taxes are put into one big pot, along with income taxes and other general revenues, and benefits are paid out of that big pot. Under this perspective (which Congress uses), Social Security is a mandatory expense; as payouts increase due to the continued retirement of the baby boom generation, the government will have to figure out a way to cover them—by reallocating funds from other parts of the budget, raising taxes, or changing the underlying laws to modify the benefit formula.
Each year when the trustees’ report is released and the deficit hawks start beating their drums, it can be very confusing for those of us trying to answer client questions about the solvency of the Social Security program. There is no easy way to distinguish between the trust fund perspective and the unified budget perspective, but it is important for people to understand that under the trust fund perspective Social Security benefits do not add to the federal budget deficit. I, for one, will be very glad when the system is reformed so people will stop talking about Social Security solvency.