Social Security Finances A Primer

1
Social Security Finances A Primer

• August 2008
• National Academy of Social Insurance
• www.nasi.org

2
Overview

• What Social Security Does
• The Financial Outlook
• Context on Affordability

3
WHAT SOCIAL SECURITY DOES
4
How Many People Get Social Security?

• 50 million people receive Social Security each
  month
• 1 in 6 Americans get Social Security benefits
• Nearly 1 in 4 households get income from Social
  Security

NASI SS Brief 28
5
Who Gets Social Security?

• 31.7 million retired workers
• 4.6 million widows and widowers
• 7.1 million disabled workers
• 0.8 million adults disabled since childhood
• 3.1 million children

NASI SS Brief 28
6
How Much Does Social Security Pay?
www.ssa.gov/OACT/COLA/colaeffect.html
7
How do benefits compare to earnings?
Retired worker age 65, 2007
Annual Trustees Report, Social Security
Administration, 2007 Table VI.F10
8
How many people rely on Social Security for most
of their income?

• 90 of people 65 and older get Social Security
• Nearly 2 in 3 (66) get half or more of their
  income from Social Security
• About 1 in 5 (21) get all their income from
  Social Security

Income of the Population 55 or Older, 2004, SSA
Table 9.A.1
9
Reliance on Social Security Benefits by Race

• Percent of beneficiaries who receive half or more
  of their income from Social Security
• 65 of Whites
• 74 of Blacks
• 67 of Asians
• 78 of Hispanics
• Percent of beneficiaries who receive all of their
  income from Social Security
• 19 of Whites
• 40 of Blacks
• 28 of Asians
• 43 of Hispanics

Income of the Population 55 or Older, 2004, SSA
10
Most elderly dont receive pensions

• Percent with Employer-Sponsored Pensions
• All age 65 41
• Couples 51
• Unmarried men 42
• Unmarried women 34

Income of the Population 55 or Older, 2002, SSA
11
How Are Benefits Projected to Change in the
Future?

• Benefits will grow faster than prices, but slower
  than wages.
• The increase in the full benefit age from 65 to
  67 over the next 20 years means that benefits
  will replace a smaller share of retirees past
  earnings.

12
Under Current Law Net Replacement Rates will
Decline

• An average earner at 65 today gets a benefit
  that replaces about 39 percent of earnings after
  deducting Medicare premiums.
• A similar earner age 65 in 2030 will have a
  benefit that replaces about 29 percent of
  earnings after deducting Medicare premiums and
  income taxes on Social Security benefits.
• Munnell, 2004. A Birds Eye View of the Social
  Security Debate

13
Who pays for Social Security?

• Workers and their employers pay with Social
  Security taxes

14
How much do workers pay?

• Workers pay
• 6.2 of their earning for Social Security, and
• 1.45 of their earnings for Hospital Insurance
  under Medicare (Part A)
• Employers pay an equal amount
• The total is 12.4 for Social Security and 2.9
  for HI
• Social Security tax base is 102,000 in 2008

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Where does the money go?

• It is credited to the Social Security trust
  funds.
• Projections of income and outgo of the trust
  funds are made by the Office of the Chief
  Actuary, SSA.
• Annual Trustees Report, 2008

16
The Financial Outlook
17
Estimates for 2008 Finances

• Trust Fund income 820 billion (taxes)
• Trust Fund Outgo 623 billion (benefits)
• Surplus 196 billion
• By law, surpluses are invested in U.S. government
  securities and earn interest that goes to the
  trust funds.

NASI SS Brief 28
18
Shares of Income to the Trust Funds Estimated
for Calendar Year 2008
NASI SS Brief 28
19
How do actuaries estimate the future?

• Review the past birth rates, death rates,
  immigration, employment, wages, inflation,
  productivity, interest rates
• Assumptions for the next 75 years
• Three scenarios Low cost High cost
  Intermediate (best estimate)

20
The Long-Range Forecast(Best estimate)

• In 2017, tax revenues into the trust funds
  forecasted to be less than benefits due that
  year. Interest on the reserves and the assets
  themselves will help pay for benefits until 2041.
• In 2041, reserves are projected to be depleted.
  Income is forecast to cover 78 of benefits due
  then.
• By 2082, assuming no change in taxes, benefits or
  forecasts, revenue would cover about 75 of
  benefits due then.

21
Other Scenarios

• High cost Trust fund reserves would be
  depleted in 2031, instead of 2041.
• Low cost Social Security is solvent for 75
  years and beyond.

22
The Actuarial Deficit(Best Estimate)

• Long-range deficit is 1.70 of taxable payroll
• This means
• The gap would be closed if the Social Security
  tax rate were 1.70 higher.
• That is, 0.85 higher for both workers and
  employers, or 7.05 instead of 6.2 today.

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Why will Social Security cost more in the future?

• The number of Americans over age 65 will grow
  faster than the number of workers.
• Boomers are reaching age 65
• People are living longer after age 65
• Birth rates are projected to remain stable in the
  future
• People 65 and older will increase from 13 to
  20 of all Americans

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What Social Security Can Americans Afford in the
Future?
25
Population Ratio 1 Beneficiaries per 100
workers

• 20 per 100 workers in 1960
• 30 per 100 workers in 2005
• 50 per 100 workers in 2050

Annual Trustees Report, 2008
26
Population Ratio 2 How Many People Does Each
Worker Support?

• All Americans rely on what workers produce.
• Workers support other people within families
  between relatives in separate households and
  taxes that support public benefits and services
  education, Social Security, Medicare, etc.

27
Consumer-to-Worker Ratio Over TimeNumber of
Persons Each Worker Supports
NASI SS Brief 4 Chart 1
28
How fast is Social Security growing as a share of
the economy?

• In 2007, Social Security benefits were 4.3 of
  GDP Social Security taxes equaled 4.9 of GDP.
• By 2030, SS benefits are projected to be 6.0 of
  GDP an increase of 1.7 percentage points over
  Social Security taxes we are paying today.
• When boomers were children, spending on public
  education rose by more than twice as much over a
  similar period 2.9 percentage points in 25
  years.
• Annual Trustees Report, 2005

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How big is the Social Security financing
shortfall as a share of GDP?

• The financing deficit as a share of taxable wages
  is 1.70 percent over the next 75 years
• The same deficit as a share of the entire economy
  (or GDP) is 0.6 percent.

2008 Trustees Report
30
Why is the deficit so much smaller as a share of
GDP?

• The answer is because Social Security taxable
  wages are only a relatively small part of GDP.
  Wages taxed for Social Security are 39 percent of
  GDP. The other 61 percent of national income is
  not taxed to help pay for Social Security.

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What is that non-taxable income?

• Income not subject to Social Security taxes
  includes
• -- earnings above the tax cap, 102,000 in 2008
• -- tax exempt compensation (non-taxable fringe
  benefits, tax-deferred accounts, etc)
• -- wages of about one in four state and local
  workers who are not covered by Social Security
• -- income from property stock dividends,
  interest, and rental income.

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Social Security Shortfall and Other Policy Changes

• The Social Security shortfall over the next 75
  years is smaller than the lost revenue from
  making permanent the tax cuts of 2001 and 2003.
  The Social Security shortfall is about one-third
  the size of the tax cuts over the next 75 years.
• Social Security deficit 0.56 of GDP
• Tax cuts made permanent 1.95 of GDP
• Center on Budget and Policy Priorities, March 31,
  2008. Kris Cox and Richard Kogan, Long-Term
  Social Security Shortfall Smaller Than Cost of
  Extending Tax Cuts for Top 1 Percent.

33
How to Afford the Baby Boom in Retirement?

• Balancing Social Security will require somewhat
  more in revenue or somewhat less in benefits.
• The question Who should pay more in taxes or
  receive less in benefits?
• Additional ways to balance Social Security exist

34
Recap
Benefits are modest (dollars and replacement
rates). Yet, they are most beneficiaries main
source of income. Benefits will replace a
smaller share of earnings in the future than they
do today. Benefit cuts or revenue increases will
be needed to balance Social Security. The
long-range shortfall is small as a share of the
whole economy. The question for Americans Who
should pay in the form of lower benefits or new
contributions?
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References

•  
• Board of Trustees. 2008. The 2008 Annual Report
  of the Board of Trustees of the Federal Old-Age
  and Survivors Insurance and Disability Insurance
  Trust Funds. Washington, D.C. U.S. Government
  Printing Office.
•  
• Cox, Kris and Richard Kogan. 2008. Long-Term
  Social Security Shortfall Smaller Than Cost of
  Extending Tax Cuts for Top 1 Percent.
  Washington, D.C. Center on Budget and Policy
  Priorities.
• Lavery, Joni. 2008. Social Security Finances
  Findings of the 2008 Trustees Report. Social
  Security Brief 28. Washington, D.C. National
  Academy of Social Insurance.
•  
• Munnell, Alicia H. 2004. A Birds Eye View of
  the Social Security Debate. An Issue in Brief
  25. Trustees of Boston College Center for
  Retirement Research.
•   
• Reno, Virginia and Kathryn Olson. 1998. Can We
  Afford Social Security When Baby Boomers Retire?
  Social Security Brief 4. Washington, D.C.
  National Academy of Social Insurance.
•  
• U.S. Social Security Administration (SSA). 2008.
  Income of the Population 55 or Older, 2004.
  Washington, D.C. Social Security Administration.
•  
• U.S. Social Security Administration (SSA). 2004.
  Effect of COLA on Social Security Benefits.
  Washington, D.C. Social Security Administration.
  Available at www.ssa.gov/OACT/COLA/colaeffect.h
  tml.
• Ways and Means Committee. 2004. Background
  Material and Data on the Programs within the
  Jurisdiction of the Committee on Ways and Means,
  (108-6, 2004 Green Book). Washington, D.C. U.S.
  Government Printing Office.
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