Social Security's Future
March 09, 2005
Statement of Thomas R. Saving, Ph.D.
Public Trustee, Social Security and Medicare Trust Funds
College Station, Texas
Testimony before the Committee on Ways and Means
March 09, 2005
Mr. Chairman and Members of the Committee:
It is our privilege to be here today to testify regarding the financial outlook of the Social Security Trust Funds as shown in the 2004 Annual Report of the Board of Trustees of those funds. Work is being completed as we speak on the 2005 Annual Report for release later this month. While we will be referring to the 2004 report projections today, there has been no legislation or major economic or demographic change in the last year that would alter significantly the Social Security financial outlook we will describe, the reasons for it, and the need to address Social Security's projected financing shortfall.
As you know, Public Trustees are part-time officials appointed by the President and confirmed by the Senate to represent the public interest in an important process of public accountability. In our private lives, we both trained as economists, have taught at the university level, and have written about Social Security. As Public Trustees our primary activities are directed at assuring that the Annual Trust Fund Reports fully and fairly present the current and projected financial condition of the trust funds. To this end we work closely with the Office of the Chief Actuary in the Social Security Administration to ensure that all relevant information is considered in the development of the assumptions and methods used to project the financing of the Social Security program. Mr. Chairman, we would note for the record what we are sure you and this committee know well: it is an extraordinarily complex task to make financing projections for Social Security far into the future. The high professionalism and decades of experience of the Social Security actuaries are critical to the production of these Annual Reports.
It is important to remember always in Social Security financing discussions that the projections are for a future that is subject to considerable uncertainty. Even very small variations in assumptions and methods can produce wide differences in projections over a long period of time. Thus, the projections in the Trustees Reports are most useful if understood as a guide to a plausible range of future outcomes. And, as this hearing illustrates, the reports serve as an early warning system that allows us the opportunity to make necessary changes in a timely and responsible manner.
What is the Financial Outlook for Social Security?
As this committee well knows, what we call Social Security is, in statute, composed of two separate programs and trust funds - Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). On a combined basis the two trust funds are projected in the 2004 Trustees Report to continue to run annual cash flow surpluses of about $100 billion for the next seven years. However, those annual surpluses will steadily decline each year thereafter, until ceasing in 2017. Then, beginning in 2018, the combined OASDI trust funds are projected to begin redeeming bonds held in reserve, by amounts typically increasing from $30-$50 billion each year, until annual redemptions necessary to pay scheduled benefits exceed $350 billion (in today's dollars) in 2041 and the reserves are exhausted in 2042. At that point, the combined funds are projected to receive annual income equal to only about 73 percent of costs. Costs will exceed income each year thereafter by growing amounts, so that by 2080 annual income will cover only 68 percent of currently scheduled benefits. (See the attached figure from the 2004 Social Security Trustees Report for a depiction of this situation.) Thus, measures that would close the financing gap at the time of trust fund exhaustion and thereafter would have to be of far greater magnitude in impact than those that simply address the actuarial deficit over the next 75 years.
Considered separately - as the law requires for financing legislation - the OASI Trust Fund is about 85% of the total, and its year-by-year financial outlook tracks the combined funds' outlook just noted. Although relatively smaller, the DI Trust Fund merits continuing close attention, because its annual surpluses are projected to cease in 2007 and its reserves to be exhausted in 2029. Its history has been much more volatile than that of OASI, and the option of taking income from OASI to increase funding for DI may not be a good one.
Why Does the Social Security Retirement Program Face Financing Problems?
The financing problem that Social Security will begin facing in the next decade is, in essence, the result of demographic changes that began several decades ago. First, life expectancy began to increase at a faster pace in the late 1960s as rapid progress was made in reducing mortality due to heart disease. Progress in extending life expectancy in this country has continued since then, although with distinct shifts in the rate of that progress. The increase in life expectancy is welcome to all of us, but it does mean that retirees will receive Social Security benefits for longer periods of time as life spans continue to lengthen.
The second demographic change affecting Social Security financing was the sharp downturn in fertility that began in the mid-1970s in the U.S. and has now occurred in many countries around the world. The expansion of education and job opportunities for women, combined with the development of reliable birth control, seems to be the leading cause of the decrease in fertility. For Social Security the lower fertility that began 30 years ago has already led to some reduction in the rate of growth of the American labor force over the last 10-15 years. But as the large baby-boom generation born after WWII soon begins to retire, annual growth in the labor force will slow dramatically - about as many workers will retire each year as enter the workforce - and this not only means fewer workers paying Social Security taxes per retiree, but it also has wider implications for the growth of the American economy. Faster than historical growth in worker productivity could help offset the slower growth of the labor force, but cannot be counted on to a great extent. Future levels of immigration beyond those currently projected could also boost the growth rate of labor force and improve somewhat the outlook for Social Security finances, but again are subject to considerable uncertainty and cannot be counted on to a great extent.
As a result of the retirement of the baby boom, the largest increases in Social Security costs relative to income are projected to occur between 2010 and 2035. Social Security's costs will then grow more slowly but still continue thereafter to increase as a share of taxable payroll for the indefinite future. The baby boom generation represents the leading edge of a projected new population age structure in which those over 65 are an ever growing share of the total population due to the continuation of relatively low fertility rates and lengthening life expectancy.
How Urgent is the Need for Action to Improve the Social Security's Financing?
Given our fiduciary responsibility as Public Trustees for Medicare as well, we cannot discuss the need for action regarding Social Security financing without first noting, as we did in our Message in the Summary of the Trustees Reports last year, that the financial challenges posed by Medicare are expected to occur sooner, grow much larger, and otherwise be more difficult to address than those facing Social Security. But today's subject is Social Security, and we believe that action on it should not be deferred any longer than necessary for due deliberation and decision. For a decade the Trustees have recommended each year action to address Social Security's projected financing shortfalls because the sooner legislation is enacted, the more varied and less disruptive to American workers, their families, and the economy can be the solutions. Many years of advance notice to the public and adequate time to phase in changes slowly will allow workers to adjust their retirement plans to take account of those changes. Also, acting sooner rather than later will allow time to spread the burden of any changes across different age groups. Waiting decades to address Social Security financing could mean that the only option, given other needs at that time, might be to reduce benefits to then-retired, or nearly-retired, workers by 25 or 30 percent - an unthinkable outcome, and one that is avoidable if action is taken sooner rather than later.
There is inherent uncertainty in projecting the future and especially the far-distant future. But using the best information and methods available, the Trustees, the Congressional Budget Office, and most private forecasters all project cash flow deficits for Social Security beginning in little more than a decade and growing worse thereafter for the indefinite future because of the demographic changes we have noted. The reason to act soon is to avoid the forced necessity of more precipitous action later.
We have attached the four-page "Message From the Public Trustees" from the Summary of the 2004 Annual Reports as well as our biographical information. We thank you for the opportunity to appear before you and will be pleased to answer any questions you may have.