Understanding the Social Security Trustees Report: Will Trustees Follow CBO on Growth Projections?
For Immediate Release: March 16, 2001
WASHINGTON, D.C. -- The biggest question mark with the release of the year 2001 Trustees Report, is whether the Social Security trustees will make the same upward revisions in growth projections as the Congressional Budget Office (CBO) did earlier this year. Based on the economy's strong recent performance, the non-partisan CBO raised its long-term projections for labor and productivity growth by 0.3 percentage points. If the Social Security trustees make the same upward revision in their projections, it would reduce the projected long-term shortfall by approximately 0.30 percentage points and, more importantly, it would push out the date where the program would first face a funding shortfall from 2037 to approximately 2042.
Prior to the release of the latest CBO economic projections, the Social Security trustees projections for real wage and productivity growth were already approximately 0.2 percentage points below the CBO projections. (The two sets of projections have to be adjusted slightly for different deflators, assumptions about the growth of non-wage compensation, and assumptions on the shortening of the work year in order to make them directly comparable.) This gap is due to the fact that the Trustees had actually lowered their projections for wage and productivity growth between 1996 and 2000. The projected rate of real wage growth in the year 2000 report is approximately 0.5 percentage points lower than the rate of real wage growth projected in the 1996 report, after adjusting for the impact of the changes that the Bureau of Labor Statistics made in the consumer price index.
Unlike the non-partisan CBO, 4 of the 6 Social Security trustees are political appointees of the President. The four political appointees who will vote on this year's projections are Treasury Secretary Paul O'Neil, HHS Secretary Tommy Thompson, Labor Secretary Elaine Chao, and William A. Halter, the Acting Social Security Commissioner.
If the new trustees follow the pattern set by the CBO, then the trust fund will be projected to get through virtually the entire retirement of the baby boom generation, with no changes whatsoever. By 2042, the youngest baby boomers will be age 78 and the oldest will be age 96. Ultimately, the program will still be projected to face a shortfall, simply due to the fact that we expect future generations to live longer lives, and therefore have longer retirements, than do current retirees.
In years past, the Social Security trustees report has placed a major emphasis on the date when benefit payments are projected to exceed tax revenue, 2015 in the last report. This is unfortunate, since that date has absolutely no significance for the Social Security program. It only makes sense to maintain a separate account for the Social Security program, if it is treated as a separate fund, with its own finances. Unless the federal government were to default on the bonds held by the Social Security trust fund, an event that is almost unimaginable politically, the fact that the fund must start drawing relying on its bond income, instead of just its tax revenue, is irrelevant to the health of the program.
In fact, this date is even irrelevant to the federal government's finances. It is often claimed that after 2015, 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 with 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 1.0 percent annual wage growth projected in the 2000 trustees report implies that an average worker will be more than 40 percent richer in 2035 than at present. If the trustees accept the CBO revisions, then the real wages will be more than 50 percent higher in 2035 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. There is no plausible scenario in which tax increases attributable to Social Security (and Medicare) could prevent future generations of workers from enjoying substantially higher real wages than do workers at present.