April 23, 2007 (Social Security Byte)
Trustees Assumptions Still More Pessimistic Than CBO
April 23, 2007
By Dean Baker
Upward redistribution due to trade policy has negatively affected Social Security.
President Bush’s Social Security trustees (four of the six trustees are political appointees of the president) extended the time period for which the Social Security program is projected to be able to pay full benefits with no changes to 2041 in the 2007 Social Security trustees report issued today, one year later than in the 2006 Report.
The new projections show that after the trust fund is projected to be depleted, the program will be able to pay an average wage earner a benefit that is approximately 2 percent higher in real terms than an average wage earner would who retired in 2007 would receive.
The trustees report that annual benefits are projected to first exceed tax revenue in 2017. While proponents of cutting Social Security often highlight this date, it actually has no importance for the program whatsoever. Under the law, the program can pay full benefits as long as it has money in the trust fund (2041 in this report). The reason for accumulating a large surplus (through a regressive payroll tax) was precisely to defray the cost of paying benefits when the baby boomers retired. Medicare has intermittently drawn on its trust fund to meet its annual benefit payments over the last decade. This has never been raised as an important issue. There is no reason that drawing on the Social Security trust fund should be an issue either.
While drawing down the trust fund will pose a drain on the federal budget, this problem actually first presented itself when the size of the annual Social Security surplus peaked in 2000 at 0.9 percent of GDP. (The surplus is currently less than 0.6 percent of GDP.) As the surplus shrinks, funds borrowed from Social Security will have to be made up from other sources. There is no importance to the year in which the annual surplus shifts to an annual deficit.
It is important to remember that while the long-term problems facing Social Security are largely demographic, they have been substantially aggravated by the continuing problem of exploding health care costs and also the upward redistribution of income. As a result of the rapid rise of health care costs in the U.S., a dwindling share of labor income is subject to the Social Security tax. Thirty years ago, 87 percent of labor compensation was in the form of wages. The wage share of compensation stands at just 80 percent today, and is projected to fall below 70 percent by 2080. If age-adjusted health care costs could be contained to grow at the same rate as GDP, then it would eliminate almost 10 percent of the projected shortfall in Social Security.
Because of the upward redistribution of wage income, the share of payroll that falls under the tax cutoff (currently $97,500) has fallen to 83.2 percent, from 90 percent in 1983. It is projected to fall further to 83.0 percent by 2016. If the government adopted policies that opened up highly paid professional services to international competition (i.e. used trade policy to redistribute downward instead of upward) and restored the 1983 wage distribution, it would eliminate approximately one-third of the projected SS shortfall.
The trustees continue to have substantially more negative assumptions than CBO on both productivity growth (1.7 percent compared with 2.0 percent for CBO) and unemployment (5.5 percent compared to 5.0 percent for CBO). They also assume that the rate of immigration will decline substantially from its recent level during the years when baby boomers are retiring.
The projected long-term shortfall in Medicare increased slightly in the 2007 report, driven by the projected run-up in health care costs. The shortfall in Medicare is projected to be more than 80 percent larger than the shortfall in Social Security, even though Medicare is less than one-quarter the size of Social Security. This report triggered a warning to Congress, since there will be a year in the next seven years in which more than 45 percent of Medicare revenue is projected to come from general revenue for the second consecutive year. Unless Congress fixes the U.S. health care system, there is little prospect of bringing the Medicare system into balance.
CEPR's Social Security Byte is an analysis of the 2007 Social Security Trustees Report.