{"id":53215,"date":"2016-09-30T11:27:00","date_gmt":"2016-09-30T16:27:00","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/supreme\/legal-commentary\/the-2009-social-security-trustees-report-good-news-behind-the-headlines.html"},"modified":"2016-09-30T11:27:00","modified_gmt":"2016-09-30T16:27:00","slug":"the-2009-social-security-trustees-report-good-news-behind-the-headlines","status":"publish","type":"supreme","link":"https:\/\/supreme.findlaw.com\/legal-commentary\/the-2009-social-security-trustees-report-good-news-behind-the-headlines.html","title":{"rendered":"The 2009 Social Security Trustees’ Report: Good News Behind the Headlines"},"content":{"rendered":"\n
\n \n
\n
\n \n \n \n \n \n\n \n \n
\"Neil<\/a><\/td>\n\n

The 2009 Social Security Trustees’ Report: Good News Behind the Headlines<\/h1><\/td>\n <\/tr>\n\n

By NEIL H. BUCHANAN <\/h2>
\n <\/a><\/td>\n <\/tr>\n

Thursday, May 21, 2009<\/td>\n <\/tr>\n <\/table>\n\n

When the annual report from the trustees of the Social Security program was released last week, news coverage focused on only one or two items in the report: First, the Social Security Trust Fund is now projected to be depleted in 2037, four years earlier than projected in last year’s report. Second, the Medicare Trust Fund is now projected to be depleted in 2017, rather than last year’s estimate of 2019.<\/p>\n\n

The media’s descriptions of the report were decidedly negative, with The New York Times<\/em> running a headline that referred to the “fiscal peril’ facing Social Security and Medicare. (The online version of that article carried a similarly pessimistic headline: “Recession Drains Social Security and Medicare.’) Moreover, the article<\/a> referred to the annual report’s “bleak projections’ and described it as “suggesting that the nation could not afford the programs it had.’ Coverage in other newspapers, magazines, and electronic media was similarly pessimistic and one-dimensional.<\/p>\n\n\n\n

Given what appears to be clearly bad news, are there reasons to be upbeat, especially with regard to Social Security? Happily, there are. Despite years of propaganda suggesting that Social Security is doomed and that younger generations will never receive back a dime of the money they are paying in, it remains true that the only thing we need to maintain a healthy Social Security program well into the future is political will. <\/p>\n

We can and should continue to support this important program \u2013 especially now that we have seen what can happen to our private pensions, 401(k)’s, and savings accounts when the economy takes a negative turn.<\/p>\n

Social Security, Medicare, and “Entitlements’<\/strong><\/p>\n\n

It has become common for politicians and media sources to group Social Security and Medicare together (often with Medicaid) under the label “entitlements.’ This is an accurate description inasmuch as recipients of benefits under these programs qualify on the basis of age, health status, or other factors that “entitle’ them to benefits, notwithstanding the overall financing of the system. Even so, the use of the word entitlements has become political shorthand for the notion of out-of-control spending programs that must be reined in as soon as possible.<\/p>\n

This conflation of the long-term financial prospects facing Social Security and Medicare is seriously misleading, however. The Medicare program faces severe and immediate financial difficulties that are directly tied to the overall increases in healthcare costs in the United States \u2013 increases that affect private healthcare costs (for instance, the costs of health insurance for workers at GM, Ford, and Chrysler) as much as, or more than, they affect Medicare. Social Security, on the other hand, faces no immediate problems. <\/p>\n

In addition, the possible challenges that Social Security does face, as I describe below, are speculative and relatively easy to fix. There is simply no need to panic about the “peril’ faced by Social Security.<\/p>\n

The Trust Fund Balances and Long-Term Estimates<\/strong><\/p>\n\n

Starting in 1983, Social Security taxes were increased with the stated goal of running annual surpluses \u2013 revenues in excess of annual costs \u2013 for decades into the future. This was in response to the fact that the Baby Boom generation, which was just then fully entering the labor force, was so large that it would have been possible to cut Social Security taxes or increase Social Security benefits dramatically and still run annual balanced budgets for years to come. <\/p>\n

When the Boomers began to retire, however, it would then have become necessary to increase taxes and cut benefits. Given the difficulty of taking away benefits once given, the plan adopted in 1983 maintained taxes and benefits on smooth trajectories. This plan was adopted, moreover, in the full knowledge that it would result in huge surpluses in the Social Security program for thirty or forty years, followed by deficits for several decades thereafter.<\/p>\n

We are still in the first phase of that plan, with an excess of tax revenues over benefits in 2009 of about $19 billion dollars, and with annual surpluses set to continue until 2016. When benefits begin to exceed revenues, the difference will be made up from the general funds of the U.S. Treasury. The accounting mechanisms that keep track of this are the oft-maligned Trust Funds (with separate funds for Social Security, Medicare, and some smaller programs), which in the case of Social Security will have a balance of over $2.5 trillion by the end of this year. Over the next few decades, that balance will be drawn down, perhaps to zero. But only perhaps.<\/p>\n

The current trustees’ report, as noted above, estimates that the Social Security trust fund will run out of money in 2037. The emphasis in the press and among politicians has been on the fact that last year’s estimated year of depletion was 2041. This really is not such a big deal, however, for two reasons: First, we are currently facing the worst economic downturn in several generations (making it actually impressive that the change in this year’s estimate was not more dramatic). <\/p>\n

Second, year-to-year changes in the estimated depletion date are common. In the last twenty years of reports, the estimated date of depletion of the Social Security trust fund has been as early as 2029 and as late as 2048. Moving from 2041 to 2037, especially in the current economic environment, simply is not big news.<\/p>\n

In addition, public discussions about Social Security almost never take note of two complicating factors. First, in addition to the Social Security trustees, the Congressional Budget Office (CBO) also estimates the depletion date of the Social Security Trust Fund. Last summer, shortly after the trustees estimated that the trust fund would be depleted in 2041, the CBO estimated the depletion date to be 2049, eight years later than the trustees’ estimate. A few years before, when the trustees were guessing that depletion would occur in 2042, the CBO’s best estimate was that it would happen ten years later, in 2052. The precision of these estimates is, in other words, easy to overstate.<\/p>\n

Second, the trustees themselves actually offer three estimates each year of the path of Social Security’s finances: the Low-Cost estimate, the Intermediate estimate, and the High-Cost estimate. Perhaps understandably, the press follows the trustees’ habit of discussing only the Intermediate estimate. Yet failing to look at the other two estimates buries some important issues.<\/p>\n

The High-Cost estimates are the most pessimistic of the three scenarios, based on economic assumptions that \u2013 if they actually turned out to be true \u2013 would portend economic stagnation for decades, the likes of which the U.S. has rarely seen even for short periods of time. For example, the trustees assume an annual growth rate of inflation-adjusted Gross Domestic Product (or GDP, which roughly equates to national income) as low as 1.2% over the 75-year horizon of the estimates. The Low-Cost estimate, which is supposedly optimistic, assumes annual GDP growth of 2.9%. Finally, the Intermediate scenario assumes that GDP will grow at 2.1% per year. For comparison, the actual annual GDP growth rate since 1960 has averaged more than 3.2%, higher than any of these three scenarios.<\/p>\n

The larger point here is that different scenarios provide very different forecasts. Whereas this year’s Intermediate estimate’s date of trust fund depletion is 2037, the High-Cost estimate’s date is 2029, while the Low-Cost estimate shows the trust fund never <\/em>being depleted. In fact, the Low-Cost estimate has projected non-depletion every year that the estimates have been published.<\/p>\n

The Trust Fund Balances and “Insolvency’: It’s Incorrect to Think the Fund Will Be Bankrupt and Thus Will Not Pay Out<\/strong><\/p>\n\n

Let us assume for the sake of argument, however, that the Intermediate estimate turns out to be accurate. The trustees describe this situation as “insolvency,’ and the newspapers faithfully follow that lead. But what does insolvency, here, really mean? <\/p>\n

In some contexts, it means that you are “broke,’ that is, that you must go out of business. Clearly, that is not what insolvency means in the context of the Social Security program. Here, insolvency means that the promised benefits will exceed the amount of money that the system can pay from its annual revenues (including any withdrawals from the trust fund). If the trust fund reaches zero in 2037, the annual revenues will be sufficient to pay 76% of promised benefits.<\/p>\n

If a retiree has been receiving $1000 per month in benefits, of course, a check for $760 will be an unpleasant surprise. That is quite different from zero dollars, however, which is what “insolvency’ implies in common parlance. <\/p>\n

For example, last Spring I was standing at a bus stop in Washington, D.C., where another person in line was having a (loud) conversation on her cell phone. She appeared to be recently out of college, and she was telling her friend that she had just received her annual statement from the Social Security system. After stating the estimated benefit that she would receive if she retired at age 67, she said, “But there was an asterisk, which said: \u2018The system will be bankrupt in 2041.’ So I won’t get any<\/em> money by the time I retire.’ <\/p>\n

This is a misunderstanding that Social Security should take pains to avoid, by being clearer on its statements about what the real situation will be. Granted, the annual statements do not say that Social Security will be “bankrupt’ or “broke.’ They say that the trust fund “will be exhausted’ on a particular date. Even so, it is not too surprising that young people might misunderstand and conclude that the system will be gone before they retire. It is important for them (and all of us) to know, however, that this is definitively not true<\/em>.<\/p>\n

Still, readers may point out that, even if the system continues, it will be a serious problem if benefits are cut by 24% or any other amount in 2037 (or whatever year the trust funds are depleted \u2013 if ever). Surely, it would be a big deal for the cuts to happen all at once, which might give future Congresses a reason to smooth the transition in whatever way they see fit. <\/p>\n

Even so, because benefits are projected to rise each year, even a 24% cut in thirty years would leave those future beneficiaries with higher benefits than Social Security recipients receive today (adjusted for inflation). If there is an argument that benefits and taxes need to be adjusted immediately to avoid future “insolvency,’ we must take into account that both incomes and benefits will be higher in those years.<\/p>\n

In short, invocations of doomsday scenarios in which we are to believe that Social Security will go belly up and disappear are \u2013 even in the context of today’s deep recession \u2013 utterly false. Under current law, the worst that can happen is that benefits will have to be adjusted automatically downward at some future date, leaving future beneficiaries with benefits that nevertheless will have more buying power than those received by their grandparents.<\/p>\n

Medicare, Health Costs, and the Future<\/strong><\/p>\n\n

As I noted earlier, the media’s coverage of Social Security is often confusing in that reporters and politicians will frequently refer to “Social Security and Medicare’ as if they are inextricably linked. This can lead to still further confusion, because the prospects of the two programs are not only different but are driven by different variables. <\/p>\n

For example, in their editorial<\/a> accompanying the news coverage of the trustees’ report, the editors of The New York Times<\/em> argued that “the only way to solve the fiscal problems of the big entitlement programs is to slow the relentless rise in the underlying healthcare costs.’ Social Security’s finances, however, are not in any direct way tied to the rise in healthcare costs.<\/p>\n

The good news is that the political debate has moved forward in at least two ways. First, many politicians and journalists are finally recognizing that the issue is not even Medicare costs, but rather, health costs in general. Second, the calls to “save Social Security” have begun to fade. <\/p>\n

While there is some talk of returning to address Social Security’s finances after we fix healthcare costs, it at least appears likely that we will not overreact to the annual trustees’ report by deciding to spend valuable legislative resources on a relatively (or perhaps completely) healthy program while other, more pressing problems languish.<\/p>\n

At this point, the best that we can hope is for Congress and the President to focus on bringing healthcare costs back under control. If they can accomplish that, they will not only save Medicare but they will also find that Social Security is a program that \u2013 although it must of course be carefully monitored \u2013 need not be a legislative priority.<\/p>\n


\n \n<\/p>\n

\n

<\/a>Neil H. Buchanan, J.D. Ph. D. (economics), is an Associate Professor at The George Washington University Law School, where he teaches tax law and policy.<\/em> <\/em><\/p>\n\n\n\n\n\n <\/div>\n

\n \n Was this helpful?<\/span>\n \n Yes<\/span>\n \n \n \n <\/path>\n <\/g>\n \n \n <\/rect>\n <\/clipPath>\n <\/defs>\n <\/svg>\n <\/i>\n <\/button>\n \n No<\/span>\n \n \n \n \n <\/g>\n \n \n \n <\/clipPath>\n <\/defs>\n <\/svg>\n <\/i>\n <\/button>\n <\/div>\n <\/span>\n