Download Financing_Social_Security-A Primer

Social Security Finances
A Primer
August 2008
National Academy of Social Insurance
www.nasi.org
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Overview
• What Social Security Does
• The Financial Outlook
• Context on Affordability
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WHAT SOCIAL SECURITY
DOES
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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
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NASI SS Brief # 28
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
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How Much Does Social Security Pay?
Type of Beneficiary
Average
Monthly Benefit
All Retired Workers
$1,081
Aged widow(er), non-disabled
$1,041
Disabled worker
$1,004
Aged couple-both receiving
$1,763
Widowed mother and two children
$2,226
www.ssa.gov/OACT/COLA/colaeffect.html
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How do benefits compare to earnings?
Retired worker age 65, 2007
$100,000
$87,800
$80,000
Past
Earnings
Benefits
$60,000
$58,900
$40,000
$37,200
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40
%
$20,000
$16,700 54%
$20,610
28%
$24,000
$15,570
$9,400
$0
Low
Average
High
Maximum
Earnings Le ve l
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Annual Trustees’ Report, Social Security Administration, 2007; Table VI.F10
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
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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
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Most elderly don’t receive pensions
Percent with Employer-Sponsored Pensions
All age 65+
Couples
Unmarried men
Unmarried women
41%
51%
42%
34%
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Income of the Population 55 or Older, 2002, SSA
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.
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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 Bird’s Eye View of the Social Security Debate”
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Who pays for Social Security?
Workers and their employers
pay with Social Security
taxes
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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
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The Financial Outlook
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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.
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NASI SS Brief #28
Shares of Income to the Trust Funds
Estimated for Calendar Year 2008
Interest on reserves
14.3%
Income taxes on
benefits
2.5%
Employer and
Employee Social
Security taxes
83.2%
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NASI SS Brief #28
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)
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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.
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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.
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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?
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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
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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.
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Consumer-to-Worker Ratio Over Time
Number of Persons Each Worker Supports
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NASI SS Brief #4 – Chart 1
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.
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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
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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
Tax cuts made permanent
0.56% of GDP
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.”
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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
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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 Bird’s 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.html.
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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