May 1, 2006 (Social Security Byte)
Trustees Continue to Assume Slowing Immigration, Weak Productivity
May 1, 2006
By Dean Baker
The 2006 Social Security trustees report contained few major changes from the 2005 report. The most striking features are that the trustees (the secretaries of Treasury, Health and Human Services, and Labor, along with the Social Security Commissioner and two independent trustees) continue to assume that productivity growth will be much slower than most other forecasters project and that the pace of annual immigration will slow even as the baby boom cohort retires.
The trustees assume that economy-wide productivity growth will average 1.7 percent over the 75-year planning period. This is 0.1 percentage point higher than in the 2005 report, but they also assumed that the gap between the CPI and the GDP deflator will be 0.1 percentage point higher than in the 2005 report, so that the change in the productivity assumption had not impact on projected real wage growth, and therefore no effect on the long-term solvency of the program. By comparison, in their long-term projections, both the Congressional Budget Office and the Office of Management and Budget assume that productivity growth will average 2.1 percent.
The trustees also assume that immigration will be slower in the years ahead than it has been in the recent past. They assume that annual immigration will soon fall to 950,000 and eventually to just 900,000 a year compared to peaks of more than 1.3 million a year in 2001-2002. According to the trustees’ sensitivity analysis, if immigration were sustained at the high levels of the recent past, it would reduce the long-term shortfall by 12 percent.
The projected date of depletion of the trust fund was moved forward a year to 2040, as recent economic news has been somewhat worse than had been projected. Specifically, last year’s report projected that average real wage growth in 2005 would be 2.1 percent, followed by 2.2 percent growth in 2006. The new trustees report shows real wage growth in 2005 as just 1.0 percent and projects real wage growth for 2006 of just 1.2 percent.
Even with the weak economy assumed by the trustees, before-tax wages will be far higher for future generations of workers than at present. In the year 2040, when the program is first projected to face a shortfall, the average hourly wage is projected to be almost 50 percent higher than it is at present. This means that even if Social Security taxes were raised by 4.0 full percentage points over this period, the trustees project that workers in 2040 will still earn wages net of Social Security taxes that are almost 40 percent higher than today’s workers.
The trustees’ projections continue to show that the major threat to the economic well-being of future generations is rising health care costs. These costs are projected to continue to rise far more rapidly than per-capita income over the next three decades. By 2025, the trustees’ projections imply that the per-capita cost of health care for a worker between the ages of 55 and 65 (in other words below the age where they qualify for Medicare) will be close to $18,000 a year, in 2006 dollars.
The projection of explosive health care cost growth caused the trustees to move forward the date at which the Medicare trust fund is projected to be depleted by two years to 2018. Medicare’s current spending already exceeds its annual revenue, but it is making up this shortfall from its trust fund, exactly as specified under the law. (President Bush has suggested that Social Security might not be able to use its trust fund in the same way.)
The projected deterioration in Medicare’s status is probably the most notable change in this year’s reports. The trustees continue to assume a much more pessimistic picture of the economy than most other forecasters which causes them to project a considerably more pessimistic picture of Social Security’s future than the non-partisan Congressional Budget Office (CBO). The most recent projections from CBO showed that Social Security can pay all scheduled benefits through the year 2052 with no changes whatsoever.
Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC and co-author (with Mark Weisbrot), of Social Security: the Phony Crisis (2000, University of Chicago Press).
CEPR's Social Security Byte is an analysis of the 2006 Social Security Trustees Report.