Short Answers to Common Questions about Social Security

Published: May 2013

Developed to accompany
Social Security Finances: Findings of the 2013 Trustees Report
Social Security Brief #42, May 2013

1. Who are Social Security’s trustees and why do they issue an annual report? Social Security has six trustees: the Secretaries of the Treasury, of Labor, of Health and Human Services; the Social Security Commissioner; and two public trustees, who by law must be from different political parties, are appointed by the President, and must be confirmed by the Senate. They issue an annual report on Social Security’s finances to give Congress and the public ample time to consider any changes that may be warranted to keep the program’s income and outgo in balance over the entire 75-year period for which Social Security’s financial estimates are made.
2. How can the trustees know what’s going to happen 75 years from now? They can’t; no one can. Still, they provide essential guidance to policymakers responsible for ensuring that Social Security can pay all scheduled benefits. So the trustees make three long-range financial forecasts — high-cost, low-cost, and intermediate — and use the intermediate estimate as the basis for projecting income, outgo, and possible imbalances. The one sure thing is that the trustees’ 75-year estimates can never be precisely accurate and will change from year to year.
3. The trustees talk about a projected 75-year shortfall as a “percent of payroll.” What do they mean? Why not just talk about dollars? Workers’ earnings — employers’ payrolls — are the main source of Social Security financing. Calculating program costs as a percentage of the payrolls covered by Social Security avoids the complications that would arise from using dollar figures to measure the cost of one set of benefits in one time period versus another set of benefits in another time period when the value of a dollar is different.
4. Last year the trustees projected that the 75-year shortfall would average 2.67 percent of payroll. This year they’re projecting 2.72 percent of payroll. Why the difference? The main reason for the change is the one-year advance in the 75-year projection period, which is now 2013-2087. The substitution of a relatively high-cost year (2087) for a lower-cost year (2012) inevitably increases the projected shortfall somewhat, unless offset by other factors. The trustees noted that the projected date when Social Security’s reserves will be depleted (if Congress takes no action in the meantime) remains unchanged: 2033.
5. How have the Great Recession and slow recovery affected Social Security? Because of high unemployment and stagnant wages, income from workers’ earnings has been somewhat lower than expected. And because many laid-off workers find themselves forced to claim Social Security as soon as they can, outgo for benefits has been somewhat higher than expected.
6. So do economic downturns doom Social Security? On the contrary, Social Security’s long-term financing enables the program to ride out even sustained downturns in a volatile market economy, just as it was designed to do. During rough times Social Security functions as a giant economic shock absorber. In 2012 Social Security pumped nearly $775 billion into the economy in the form of benefit payments that maintained the purchasing power of more than 56 million beneficiaries and their families.
7. But isn’t Social Security contributing to the national debt? Social Security cannot contribute to the debt because by law it cannot borrow money. Since 1935 Social Security has collected $16.3 trillion and paid out $13.6 trillion, leaving a balance of $2.7 trillion in the trust funds at the end of 2012.
8. But last year the program spent more on benefits than it collected in payroll taxes. So is it going broke? No. Social Security has three sources of income: payroll taxes, income taxes on benefits paid to higher-income recipients, and interest earned on its reserves. Social Security is still accumulating reserves through interest earned on the money in its trust funds. The reserves are projected to increase from $2.7 trillion at the end of 2012 to $2.9 trillion at the end of 2020. After that, if Congress has not acted in the meantime to increase revenues or lower benefits, the reserves would start to be drawn down to help pay benefits.
9. But the media sometimes refer to Social Security’s “cash-flow imbalance.” Is it running out of cash? No. The term “cash flow” as used in the unified federal budget refers to the program’s annual income and outgo without counting interest earned by the trust fund reserves. If interest is ignored, income was less than outgo in 2012. But interest is part of Social Security’s total income, and the U.S. Treasury is firmly obligated to pay the interest due to the trust funds – an obligation just as firm as the commitment of the United States to any other holder of U.S. Treasury bonds. With interest income included, Social Security had a $54 billion surplus in 2012.
10. If the reserves are used up to help pay benefits, will Social Security be bankrupt? No. “Bankruptcy” means having no funds. Although the trustees estimate that the reserves will be depleted in 2033 (but only if Congress has not acted in the meantime), revenue continuing to come into Social Security from payroll taxes and income taxes on benefits paid to higher-income recipients would cover about 75% of scheduled benefits. It is this shortfall — not bankruptcy — that lawmakers need to address.
11. Are there ways to fix Social Security’s shortfall without cutting benefits? Yes. Many public opinion surveys, including a recent NASI study,[1] have found that most Americans would rather pay somewhat more to keep Social Security strong than cut benefits for current or future beneficiaries. For example, gradually increasing the contribution rate from 6.2% to 7.2% and gradually removing the cap on earnings taxable for Social Security could address the shortfall and pay for modest benefit improvements.
12. Social Security’s Disability Insurance (DI) trust fund will soon be depleted. What can be done? Social Security pays benefits from two legally separate trust funds: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). Of the 6.2% of earnings that workers and employers each pay to Social Security, 5.3% goes to OASI and 0.9% goes to DI. Policymakers could keep DI in balance for the next 75 years by raising the DI rate from 0.9% to 1.1%. Alternatively, they could temporarily reallocate part of the OASI tax rate to the DI fund to equalize the two funds over the next 20 years. Congress has reallocated the tax rate between DI and OASI many times in the past without controversy and could do so again.[2]
13. Will the retirement of the baby boomers overwhelm Social Security? No. The baby boomers’ retirement did not catch Social Security by surprise. Benefit reductions that were enacted 30 years ago, including gradually raising the age of eligibility for full benefits from 65 to 67, are still phasing in and have slowed spending for future benefits. In addition, the boomers’ tax contributions throughout their working years have helped cover the cost of their retirement.
14. Some commentators claim that Social Security is simply unaffordable. Is this true? A widely accepted way to evaluate the affordability of Social Security — or other major systems such as health care, education, or defense — is as a share of the entire economy, or gross domestic product (GDP). Social Security was 5.0% of GDP in 2012 and is expected to increase to 6.2% of GDP by 2035, when all of the baby boomers will have retired; then it is expected to decline slightly and level off at 6.0% to 6.2% thereafter. By way of comparison, the projected increase until 2035 is smaller than the increase in national spending for public education when the baby boomers were children. Social Security is affordable, and surveys show that Americans are willing to pay for it.