The Social Security trustees released their annual report yesterday, which helps put Social Security in the proper context as it approaches its landmark 75th birthday on August 14.
There is little doubt that Social Security will remain a substantial part of American families’ income security. It offers basic income guarantees in the event of retirement, disability, or death of the primary breadwinner. The benefits are sufficient to pay for some of a family’s basic consumption needs, but they offer only a very modest lifestyle.
Social Security is as close to a universal basic insurance program as exists in the United States, with close to 90 percent of the population being fully insured in the case of retirement and death of a bread winner[1]. But Social Security faces long-term financial challenges. These have been somewhat aggravated by the worst recession since the Great Depression, but they are clearly manageable.
Social Security’s basic universal insurance protections
Social Security replaces part of a family’s income when the primary breadwinner retires, becomes disabled, or dies. The nation’s premier retirement, disability, and life insurance program for working families was created in 1935 and served 52 million people in 2009[2]. Retired workers made up the largest group of Social Security beneficiaries with 33.5 million in 2009—7.8 million beneficiaries received disability benefits and 6.4 million got benefits from the survivorship program. A total of 4.2 million children received Social Security benefits from the three income guarantee components of Social Security.
Social Security is also a near universal insurance protection for American families. Eighty-eight percent of the total population was fully insured under Social Security in 2009. In other words, close to 90 percent of the population had earned enough credits to qualify for retirement or survivorship benefits [3].
Social Security benefits ensure a basic standard of living but not much more. The average monthly retirement benefit in 2008 was $1,105 [4]. The typical disability and survivorship benefits are lower at $1,063 and $981, respectively [5].
The maximum benefit is substantially higher, but it still doesn’t offer an overly generous income. The maximum benefit for people who worked at least 35 years at the maximum taxable Social Security earnings and retired at age 66—the normal retirement age—in 2008 was $2,323 per month [6].
Social Security checks constitute a reliable and critically important source of income for families 65 years old and above. For instance, families in this age group in the bottom 20 percent of the income distribution of the population 65 and older received on average 83.2 percent of their income from Social Security in 2008 [7]. And the program’s benefits provided the majority of income for 49.1 percent of families 65 years old and older [8]. Social Security was still the single largest source of income for 43.6 percent of families 65 and older in the fourth quintile. The program took second place after earnings from work only for elderly families in the top fifth of the income distribution [9].
Economic and demographic changes are affecting women’s Social Security benefits
The labor market has seen important economic and demographic changes over the past decades that have direct implications for Social Security and its benefits. Addressing these changes will be a critical step to ensuring that Social Security remains the most efficient, universal, and basic social insurance program that it can be.
Many of the past economic and demographic changes affect women and their long-term economic security more than they impact men. Women’s participation rate in the labor market has risen, and they now are half of all workers [10]. This means they are more likely than in the past to have enough earnings under Social Security to qualify for their own benefits.
Married couples with two benefits under Social Security may be at a disadvantage relative to single-earner couples with similar lifetime earnings because the benefit reduction that occurs upon the death of one spouse can be larger. The surviving spouse of a dual-earner couple, where both spouses had the same benefits, will lose half of the combined earnings, while a single-earner couple will lose only one-third of the combined benefits upon the death of one spouse. Since men still tend to die earlier than women this disadvantages working women in particular.
Moreover, women continue to be more likely to take off time from work to care for children [11], which is disruptive to their careers and reduces their lifetime earnings and Social Security benefits. Divorces have also trended up over time, but divorcees only qualify for benefits tied to their former spouses’ incomes if they have been married for at least 10 years.
And finally, same-sex marriages have become a growing reality in many states, but married same-sex couples do not qualify for the same social insurance protections under Social Security as married couples that aren’t the same sex. This tends to affect women more than men since women tend to have fewer savings outside of Social Security than men do. In the end, older women still experience higher poverty rates than men do, though their poverty rates tend to be lower than those for working-age women because Social Security serves its basic insurance function [12].
Addressing these economic and demographic challenges (as well as the financial challenges described below) through Social Security reform will ensure that Social Security continues to offer universal, basic insurance benefits in the most efficient way possible.
Social Security’s manageable financial future
Payroll taxes are Social Security’s primary source of revenue. Employers and employees are required to pay 6.2 percent of their earnings to Social Security, and earnings that are subject to the payroll tax are capped. Earnings beyond the cap are not subject to the payroll tax and are not counted for the purpose of Social Security benefits. The cap on earnings subject to the payroll tax currently increases annually in line with the overall average wage of workers. The cap was set at $106,800 in 2010, which is the same it was in 2009.
Social Security’s financial challenges are generally manageable. The program has generated a cash surplus since 1983, and tax revenue has been greater than benefit payments. The surplus has been invested in the Social Security trust funds, with the money invested in government bonds. The trust funds amounted to $2.5 trillion, or 353 percent of annual benefit payments, in 2009, the last year for which data are available [13].
The Social Security trustees project now that payroll taxes will fall below benefit payments in 2010 and 2011, exceed benefit payments from 2012 to 2014, and then continuously exceed benefit payments through 2015 [14]. The interest and principal from the bonds in the trust funds will help to cover the cash shortfall after 2015 through 2037 [15]. The date of final trust fund exhaustion has not changed from the trustees projections made in 2009. The program can pay on average 78 percent of its promised benefits with its tax revenue from 2037 to 2085, if nothing changes [16]. This level of future benefits will be higher in inflation-adjusted terms than the benefits the current Social Security beneficiaries can expect [17].
These shortfalls pose a manageable policy challenge. Social Security’s costs will be comparatively stable over time. Figure 1 shows the income and cost rate of Social Security relative to gross domestic product. The figure shows acceleration in the cost rate from 2013 to 2035 as the baby boom generation enters and stays in retirement. But the cost increases stop before the trust funds are exhausted in 2037. This was Congress’s intent in creating the trust funds—to cover the expected costs of the baby boomer retirement. The expected shortfalls will likely appear after the baby boom generation is gone—the youngest baby boomers, born in 1964, will be 73 years old in 2037. The costs actually decline again in the subsequent years, albeit at a very slow rate, and stay at 5.9 percent to 6.0 percent for the next 50 years [18]. That is, Social Security’s costs will be very stable for generations to come after the cost increase associated with the baby boomer retirement.
What this all means is that clearly there will be no ongoing cost explosion in Social Security that could threaten the country’s finances in the long run.
The data, though, also show an almost continuous decline in tax revenue (income) for Social Security over time. Payroll taxes amount to the equivalent of 4.6 percent of gross domestic product in 2010, are projected to rise again to 4.9 percent to GDP by 2017, and are expected to fall gradually to 4.6 percent of GDP in 2085 (Figure 1). This income decline reflects the assumption that nonwage compensation, such as health care, other benefits, and bonuses, will make up an ever greater part of employees’ pay, thereby eroding the tax base for Social Security. As recent as 2001, total taxable earnings exceeded 40 percent of GDP. But this ratio had dropped to 37.0 percent by 2009, and while it is expected to rise again to 37.6 percent by 2020, the long-term projections continue to show a decrease in Social Security’s tax base as share of GDP, ultimately reaching 34.5 percent in 2085 [19]. Lower health care costs could contribute to a slower erosion of the Social Security tax base and of Social Security’s revenue [20].
Social Security’s resiliency in the Great Recession
It shouldn’t be necessary to point out that a basic family insurance program that celebrates its 75th birthday this year has weathered the test of time. It’s survived some of the Great Depression, World War II, two oil crises, the productivity slowdown after the 1970s, and two major financial market crashes in its history. But the Great Recession after 2007 clearly dented Social Security’s finances due to less tax revenue and higher expenditures in the short run as a comparison of the projections from 2007 and 2010 show.
The Great Recession’s impact led Social Security’s trustees to revise their projections this year, which consequently showed that Social Security’s financial shortfalls may occur a few years earlier than previously expected. The trustees expected in 2007 that benefit payments will exceed tax revenues in 2017, but then moved that date to 2015 in the 2010 projections. And they moved up the trust fund exhaustion date from 2041 to 2037 [21] [22].
A comparison of the two trustees reports for 2007 and 2010 shows that the changes in Social Security’s outlook were due to the Great Recession. The trustees especially adjusted their expectations of the program’s future costs, which reflects an assumption that more people started to retire as a result of the labor market troubles during the past few years than was previously projected. The actual data and projections from the 2010 trustees report show costs that are 17 percent greater for 2009 and 2011 than was expected in 2007. Social Security’s costs were also projected to remain higher than the trustees in 2007 anticipated through 2027 (Figure 2). After that year, however, the 2010 projections actually showed lower costs than the 2007 projections. The differences in the revenue projections, in comparison, are marginal between the 2007 and 2010 trustees report (Figure 2) [23].
The changes in the projections from 2007 to 2010 to account for the Great Recession also meant that Social Security’s expected surpluses were much smaller in the short run. The data show a clear deterioration in the actual and expected surpluses during the Great Recession and the projected subsequent recovery (Figure 3). Not only did the trustees thus shorten the period of cash surpluses by two years, but they also lowered the size of the cash surpluses during those years. The projected deficits are then remarkably similar in the two trustees reports once the effects the Great Recession’s effects wear off.
The bottom line is that Social Security has clearly been disrupted by the most severe recession since the Great Depression. This has largely been the consequence of a larger share of older workers retiring than was the case before the crisis. This shouldn’t be surprising since the Great Recession marked a low in labor market opportunities for older workers. The unemployment rate for workers 65 and older reached a historic high in 2009 with 6.4 percent [24]. Social Security, though, is still expected to pay all of the promised benefits for almost another three decades. Once again, the program has shown it can withstand the challenges of time.
This is great news for American families, who increasingly need to rely on Social Security’s basic universal income guarantees. Personal wealth has been decimated from the financial market and housing crash of the past few years, employers have cut back on jobs and on employee benefits for those workers who still have a job, and improvements in all of these areas are painfully slow.
Social Security will become an even more efficient, basic, and universal income insurance if it can respond to the demographic and economic changes of the past decades. It is good to know that a tried and true income guarantee is still there after 75 years for those who need it the most.
Christian E. Weller is a Senior Fellow at American Progress and an Associate Professor of Public Policy at the University of Massachusetts Boston.
Endnotes
[1]. The disability insurance program is technically a separate program. The eligibility criteria for disability insurance are lower than for retirement. The share of the population that has disability insurance may thus be higher.
[2]. Social Security Administration, "Annual Statistical Supplement 2009" (2010).
[3]. SSA, "Annual Statistical Supplement 2009."
[4]. SSA, "Annual Statistical Supplement 2009."
[5]. SSA, "Annual Statistical Supplement 2009."
[6]. SSA, "Annual Statistical Supplement 2009."
[7]. Social Security Administration, "Income of the Population 55 and Older: 2008" (2010).
[8]. SSA, "Income of the Population 55 and Older: 2008."
[9]. SSA, "Income of the Population 55 and Older: 2008."
[10]. Heather Boushey and Ann O’Leary, "Our Working Nation: How Working Women Are Reshaping America’s Families and Economy and What It Means for Policymakers," (Washington: Center for American Progress, 2009).
[11]. Heather Boushey, "Social Security Cares," (Washington: Center for American Progress, 2009).
[12]. SSA, "Annual Statistical Supplement 2009."
[13]. Social Security Administration, "2010 Trustees Report" (2010).
[14]. SSA, "2010 Trustees Report."
[15]. SSA, "2010 Trustees Report."
[16].SSA, "2010 Trustees Report."
[17]. The inflation-adjusted benefits for new retirees who retire at the normal retirement age after a lifetime of medium earnings in 2038 will be equal to 114.5 percent of the initial benefits of a similarly situated worker retiring in 2010, even if there is an across-the-board benefit cut to scale future benefits to the expected future cash flow from payroll taxes. Calculations based on Social Security Administration, 2010 Trustees Report.
[18]. SSA, "2010 Trustees Report."
[19]. SSA, "2010 Trustees Report."
[20]. David Cutler, "Health System Modernization Will Reduce the Deficit," (Washington: Center for American Progress, 2009).
[21]. Social Security Administration, "2007 Trustees Report" (2007); SSA, "2009 Trustees Report."
[22]. A comparison between the four trustees reports for 2007, 2008, and 2009 shows that the trustees made the larger adjustments to their projections after 2008. This is consistent with the pattern of the Great Recession, which had only started when the trustees released their 2008 report at the end of March 2008, but which had gained substantial negative momentum by May 2009, when the 2009 Trustees Report was released. See Social Security Administration, 2007 Trustees Report, Social Security Administration, 2008, 2008 Trustees Report, Washington, DC: SSA, and Social Security Administration, 2009 Trustees Report for details.
[23]. The different projections in the income and cost rates as share of GDP show almost exactly the same relative differences. The change in the anticipated short-run outcomes for Social Security results entirely from higher-than-expected costs and not lower-than-expected income. Author’s calculations based on SSA, 2007 Trustees Report and SSA, 2009 Trustees Report.
[24]. Bureau of Labor Statistics,"Current Population Survey" (2010).