On March 23, the Social Security trustees released their annual report, which provides an overview on the state of Social Security and projections for the program’s finances for the next 75 years. Given the heated debate over Social Security privatization, the new numbers will quickly be used and misused in the discussion. Before the debate begins, there are five basic yet important points that should be kept in mind when considering the trustees’ report.
1.) The Trust Funds are Real
Social Security has two trust funds, one for retirement and survivorship purposes and one for the disability insurance program. However, for practical purposes, they are typically considered together. The trust funds are currently invested in special issue Treasury bonds. Common sense dictates that these are real assets reflecting real money in the future that Social Security can count on to make benefit payments. To see this, consider the following. According to the trustees’ report released in 2005, Social Security would have to start drawing on the assets in the trust funds in 2017. This means that Social Security will go to the Treasury, from which it bought the bonds in the first place, and re-sell them to pay for benefits. If the trust funds were not real, the assets in them could not be redeemed. That is, the Treasury would simply not pay. Some people may believe that this will be the case. However, consider also that at the same time, the Treasury will honor its promised interest and loan payments to foreign investors, who have financed 80 percent of federal government deficits since 2001. It is unreasonable to assume that politicians will allow the Treasury to default on promised payments to America’s seniors, but honor promised payments to foreign investors. It is also unreasonable to assume that the Treasury will default on its payments to foreign investors. Thus, it is much more likely that the Treasury will honor its promises to both America’s Social Security beneficiaries and foreign investors. However, if there is little doubt that the Treasury will pay the money when Social Security needs it, the trust funds are obviously real money that Social Security can count on. Full, promised benefits are therefore secure until the trust fund exhaustion date, which was 2043 in last year’s trustees’ report.
2.) Social Security’s Benefits are Secure for Decades
The outlook for Social Security presented in the trustees’ report tends to change little year to year, although it varies more over longer periods of time. This year’s report predicted that the trust funds will be exhausted in 2041. Despite a slight worsening in the outlook for Social Security from last year, the direction over the previous twelve years has been one of an improving outlook for Social Security, rather than a worsening one (figure 1). From 1994 to 2004, the exhaustion date rose from 2029 to 2042, after it had declined from 2048 in the 1987 trustees’ report. Today’s report still gives Social Security an extra twelve years from its low point of 2029. In fact, the Social Security Administration said in its press release that there was “little change in Social Security solvency” from 2004 to 2005. Far from facing an imminent crisis, policymakers have time to evaluate all options that would ensure that Social Security can continue to fulfill its role as the country’s premier income insurance program for middle-class families over the long-run.
Figure 1: Trust Fund Exhaustion Dates over Time
3.) With No Changes, Social Security Pays Better than Privatized System
Upon exhaustion of the trust funds, Social Security will still receive taxes that will allow it to pay for benefits. In fact, according to the 2005 trustees’ report, Social Security can still pay the vast majority of its promised benefits if nothing is changed and Social Security receives no additional financing. After trust fund exhaustion, Social Security could still pay more than 70 percent of promised benefits. This would mean that future retirees would always get, in inflation adjusted terms, higher benefits than today’s retirees (figure 2). Moreover, these benefits would be greater than what people could expect from a privatized system along the lines laid out under the second option of President Bush’s Commission to Strengthen Social Security (CSSS) in 2001, according to estimates by the nonpartisan Congressional Budget Office. [1]
Figure 2: Average Trust Fund Financed Monthly Benefits
4.) Trustees’ Economic Predictions are Pessimistic
The predictions made each year by the Social Security trustees depend on specific economic and demographic assumptions. Importantly, the outlook for Social Security has improved as the trustees have increased their projections for economic growth, among other things, during the past few years. Historically, economic growth has averaged 3.4 percent annually after accounting for inflation, according to the Department of Commerce’s Bureau of Economic Analysis. For the long-run, though, the Social Security trustees assumed an inflation adjusted growth rate of 1.8 percent in their 2005 report. If the trustees were right, growth would be 47 percent slower in the future than it was in the past. This has two profound implications for the Social Security debate. First, there is a good chance that the economy and thus Social Security’s finances will actually beat these predictions in the long-run. Importantly, the 2005 Trustees’ Report does not change its long-term growth outlook, despite the fact that productivity growth in recent years has been much higher than previously assumed by the trustees.
Second, substantially slower economic growth would also mean significantly lower stock market gains. The stock market reflects the expected profitability of the economy. Profits grow a lot slower when the economy grows slower. Thus, the stock market would also grow a lot slower in the future if the economy slowed down. In a recent Wall Street Journal survey of prominent economists on Wall Street, the majority put stock market growth for the future between 4.0 percent and 4.6 percent, instead of the historical average of 6.5 percent. Under a privatized Social Security system, this would mean that private accounts would also increase much more slowly than is often assumed.
5.) Report Already Shows that Privatization Does Not Work
The Medicare trustees’ report is released along with the Social Security trustees’ report. One reason for the growing shortfalls in Medicare is the ill-advised move toward greater privatization of the program, which was the centerpiece of the new Medicare law President Bush enacted in 2003. Privatization has increased rather than decreased Medicare costs and thus worsened the program’s financial outlook. In passing the new Medicare law, President Bush and Congressional leaders acquiesced to the private health insurance plans’ demands for more money, removing any pretense to the cost-effectiveness of privatization, as private health insurance plans receive more than 100 percent of what it would cost Medicare to offer the same services. A similar fate would await Social Security. Costs would increase in the form of administrative fees to management companies and premiums to insurance companies for offering lifetime annuities upon retirement. These higher costs would be matched by lower, not higher benefits than Social Security could pay without any changes to the system, as estimates by the Congressional Budget Office show.
Christian E. Weller is senior economist at the Center for American Progress.