March 23, 2005
By Dean Baker
The Social Security trustees moved the projected date of the depletion of the trust fund forward one year to 2041 in their 2005 report. This change was driven almost entirely by the economy’s weaker than expected performance last year, as all the key long-term demographic and economic assumptions were left unchanged. The economy’s weakness caused the trustees to revise down the cumulative trust fund surplus projected for 2013 by approximately $100 billion (adjusted for new inflation projections) compared to the projection in the 2004 report.
Specifically, the 2004 report had projected 1.7 percent employment growth in 2004, actual growth turned out to be just 1.1 percent. The 2004 report had also projected a 2.4 percentage increase in real wages for the year, the actual increase was just 1.2 percent. The 2005 report also shows a somewhat worse picture for the next few years, as the economy continues to recover slowly from the 2001 recession.
It is important to realize that even after the trust fund is projected to be depleted in 2041, the program would still be able to pay a substantial benefit from its annual tax. If the projections prove exactly right, then the payable benefit to a person retiring at normal retirement age in 2042 would still be about 7 percent higher on average than the benefit received by current retirees.
The trustees projections imply that wages will be approximately 48 percent higher in 2041 than their current level (adjusted for inflation), which means that even if taxes were increased to maintain the program’s solvency, future generations of workers will enjoy far higher living standards than workers do at present.
The 2005 report showed a decline in the share of wage income falling under the wage cap to 84.9 percent in 2004, from the 86 percent figure that was originally reported for 2003. The Greenspan commission had set the wage cap at a level that covered 90 percent of wage income in 1983. More than half of the currently projected shortfall over the 75-year planning horizon is attributable to upward redistribution of wage income since 1983.
It is worth noting that 2041 is the only date of real importance in this report. Many proponents of privatization have highlighted 2017 (moved up from 2018 in the 2004 Report), the year when annual benefit payments are first projected to exceed tax revenue, as a key year for the program. In fact, since the trust fund is projected to have $3.4 trillion (in 2005 dollars) of government bonds at that point, 2017 would be of no consequence for the program, unless Congress defaulted on these bonds. The irrelevance of 2017 can be seen by the fact that Medicare has been relying on the bonds in its trust fund since 2004 and it has not even been raised as an issue.
It is important to recognize that projections in the trustees report are determined by the trustees, not the professional staff of the SSA. Four of the six trustees are political appointees of the President. Thomas Saving, one of the two independent trustees, was a member of President Bush’s Social Security commission and is a vocal proponent of privatization.
The trustees report is notably more pessimistic than the independent analysis done by the Congressional Budget Office (CBO), which puts 2052 as the date when the trust fund is projected to be depleted. The CBO analysis is more consistent with actual economic history. For example, the trustees project that annual productivity growth will average just 1.6 percent over the next 75 years. Productivity growth has averaged 2.1 percent over the post-war period.
The trustees also assume a slower rate of immigration than has been the recent trend. The trustees project that immigration will average 900,000 a year, even as the retirement of the baby boom generation is creating a labor shortage. By contrast, immigration in the 1990s averaged 1.3 million a year. If productivity growth and immigration continue at their past rates, then Social Security will be in much better shape than projected by the trustees.
CEPR's Social Security Byte is an analysis of the 2005 Social Security Trustees Report.