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June 2007
by James C. Musser, ASBA Washington Representative

Last month, this column focused on the latest report of the Medicare Board of Trustees; this month’s focus is on the other pillar of our retirement security system, Social Security, and the new report from the Social Security Board of Trustees. Much like the news from the Medicare Trustees the news from the Social Security Trustees is grim.

While the Trustees’ Report shows a slight improvement in the financial outlook for Social Security over last year’s report, the main concern is that dedicated tax revenues will fall below program costs starting in 2017. According to current projections, the Social Security Trust Funds will be exhausted completely in 2041, which is one year later than projected last year.

The problem facing Social Security is inherent in its design. The system was created in 1935 as an innovative form of “social insurance” rather than a welfare program and it was based on the premise that there would always be substantially more workers paying into the system than retirees receiving benefits. It also set the retirement age at 65, which, at that time, was the average life expectancy after surviving childhood.

A contributory program in which workers provided for their future retirement security by making payments into a system that used the funds to pay current benefits made great sense compared to the many radical plans floated during the depths of the Great Depression. The flaw in the design would only become apparent many years later as the number of workers per beneficiary began to decline. In 1940, the first year in which Social Security benefits were paid, there were 159 workers for each beneficiary. By 1950, that ratio had declined to 16.5 workers per beneficiary and today there are 3.3 workers for each recipient and that is projected to further decline to only two workers per beneficiary by the year 2030.

According to the Trustees, in 2006, the Old-Age and Survivors and Disability Insurance (OASDI) Trust Funds, which make up Social Security, had a combined total income of $745 billion. Of that total, $626 billion came from OASDI taxes, $17 billion came from taxes on benefits and $102 billion came from interest. Total expenditures from the OASDI Trust Funds amounted to $555 billion in 2006. The assets of the Trust Funds increased by nearly $190 billion to a total of $2 trillion.

The Baby Boomers will begin to retire in huge numbers over the course of the next ten years and the Trustees have found that OASDI costs will increase more rapidly in the period from 2010 to 2030. Longer life expectancy and relatively low fertility rates will exacerbate the problem. Annual costs of Social Security are expected to exceed its dedicated taxes in 2017 and the gap will have to be covered by Treasury obligations held by the Trust Funds. Those assets are expected to be exhausted by 2041. The burden will then fall on the general revenues collected through income taxes. The long-term growth of the Social Security and Medicare programs together will consume two-thirds of the federal budget by 2040.

Clearly, the sooner Congress acts to address these long-range problems the better for the beneficiaries and the taxpayers alike. A combination of increases in the retirement age, increases in OASDI-dedicated taxes, means testing and private sector solutions are on the table. As the Trustees say in the report, “The projected trust fund deficits should be addressed in a timely way to allow for a gradual phasing in of the necessary changes and to provide advance notice to workers. Making adjustments sooner will allow them to be spread over more generations.”

Check back each month for the latest from our nation’s capital. ASBA will be closely monitoring all the issues affecting you and your family.

James C. Musser, Esq. is a legislative consultant based in Falls Church, Virginia. His reports are updated monthly.