Understanding the Social Security Trustees' Report
For Immediate Release: March 16, 2000
The year 2000 Trustees Report will be issued against a backdrop where recent wage and productivity growth has vastly exceeded the growth rates projected by the Trustees. Real wage growth, as measured by the Social Security Administration, has increased at an average annual rate of 3.1 percent from 1996 through 1998. Productivity growth has averaged 2.6 percent from 1996 to 1999. Yet the 1999 Trustees' Report projects annual real wage growth of just 0.9 percent and long-term productivity growth of 1.3 percent.
These numbers are significantly lower than the projections that appeared in the 1996 Trustees Report. In spite of the rapid wage and productivity growth of recent years, the projections for real wage and productivity growth have been lowered by 0.5 and 0.4 percentage points, respectively since 1996, after adjusting for changes in the measurement of inflation and real output growth. The biggest question concerning the year 2000 report is the extent to which the Trustees will adjust their projections in accordance with the growth that the economy has actually been experiencing.
There are several misconceptions about the Trustees' Report and the program that need clarification. The most important misconception concerns the authorship of the Trustees' Report itself. The Report is a document of the trustees, not the actuaries of the Social Security Administration. Four of the six trustees, Treasury Secretary Larry Summers, Labor Secretary Alexis Herman, Health and Human Services Secretary Donna Shalala, and Social Security Commissioner Kenneth Apfel, are political appointees of the Clinton Administration. For this reason the report should be seen as a political document that reflects the priorities of the Administration, like the annual budget. It is not the product of a non-partisan agency like the Congressional Budget Office. The actuaries at the Social Security Administration provide input into the process of writing the report in the same way that the professional staff at the Office of Management and Budget assist in preparing budget documents. In both cases, what ultimately appears in the final document is determined by the political appointees of the Administration, not the professional staff.
This distinction is important, because there is a large divergence between the projections in the 1999 Social Security trustees report, and the most recent projections from the Congressional Budget Office (CBO). While CBO only makes explicit projections for Social Security for the next ten years, its numbers show the cumulative surplus through 2010 to be $500 billion larger than the projections in the Social Security trustees report. If the higher surplus and more rapid growth in the CBO projections were carried through into later years, it would probably extend by at least four years (to 2038) the date where the trust fund is projected to be depleted. If the trustees' projections move closer to the projections from CBO, and also to the economy's recent experience, the 2000 report will push out the projected date of the trust fund's depletion.
A second major misconception concerns the key dates for the program. The year 2014 is often highlighted as a key date in the last trustees' report, because this is when the program's expected expenditures exceed expected tax revenue. In fact, this date has no significance either for the program itself, or the federal budget. In terms of the finances of the Social Security program, the program is currently accumulating a surplus, in the form of government bonds, of more than $100 billion a year, to help address its projected future shortfall. The year 2014 would only have meaning for the program if this surplus were ignored-- in other words, if Congress were to essentially default on the debt owed to Social Security. Not one member of Congress currently advocates defaulting on the bonds held by Social Security. It is unlikely that this position will be more politically viable in the year 2014, when a much larger segment of the voting population will be dependent on Social Security.
The year 2014 also has no significance in terms of the overall federal budget. It is often claimed that at this point the government will either have to raise taxes, cut other spending, or borrow to make up for the annual shortfall in Social Security taxes. Actually, the impact on the federal budget will first be felt when the annual surplus of taxes over expenditures peaks in 2002 at approximately $57 billion. From that point forward the surplus will decline and the rest of the budget will have to accommodate the fact that there is a smaller surplus from Social Security in each succeeding year. The year 2014, when the zero line is crossed, holds no special significance.
An analogy may make this point clearer. Suppose a family spends $40,000 each year, where $38,000 is its own money and the other $2000 is borrowed from a rich uncle. Now suppose the uncle tells this family that he is going to cut back his annual lending to zero over a ten year period, with the size of the annual loan declining by $200 per year. After the tenth year, he wants to start getting repaid, with the size of the annual repayment rising by $200 a year. In this case, the family feels the pinch first in year one, when the size of annual loan has declined by $200 to $1,800. The tenth year has no particular significance to the family; like every other year, it must find a way to get by on $200 less than in the previous year.
The federal government is in the exact same situation in relation to the Social Security surplus. Once the surplus has peaked and begun declining, the federal budget can count on less assistance from the Social Security budget. Just as in the case of the family described above, there is no particular significance to the year where the annual surplus actually turns into a deficit.
A last important misunderstanding about the trustees' report is the failure to recognize that it is giving us a picture of the whole economy, not just the Social Security program. The 0.9 percent annual wage growth projected in the 1999 trustees' report still implies that an average worker will be more than 30 percent richer in 2030 than at present. Analysts who see a picture of doom facing future generations because of the projected shortfalls in the program, often miss the fact that future generations are projected to be much wealthier than today's workers.
It might be a matter of greater concern that the trustees believe that future generations of workers in America will be so much poorer than workers in other industrialized nations, where workers are experiencing real wage growth of approximately 2.0 percent annually. Since real wages in several of the wealthier European nations are already comparable to those in the United States, this difference in growth paths implies that workers in some European nations will be earning wages that are nearly 40 percent higher than U.S. workers by 2030. If living standards in the U.S. actually lag this far behind other industrialized nations, that might be a bigger cause for concern than the possibility of modest increases in Social Security taxes.