INTRODUCTION

You've heard your parents talk about Social Security, and perhaps you have a grandparent who counts on receiving a Social Security check every month. Will you be able to count on Social Security, too? Many people believe that this program which primarily provides retirement benefits is no longer a sure thing for today's young people. In this lesson we will explore that question.

Social Security is the federal government program providing old-age, survivors, and disability insurance benefits. It is formally known as Old-Age, Survivors and Disability Insurance, or OASDI. Medicare is the federal program providing hospital insurance benefits to senior citizens. It is often identified by the acronym HI. Both programs have been seen as in danger of running out of money. But on March 30, 1999, the Social Security Board of Trustees released information suggesting that the day of reckoning would come later than people had expected. Because the economy has been strong recenelderlytly and because economic forecasts also look good for the future, the Board said that Social Security trust fund assets are now expected to last for two years longer than was predicted last year. And Medicare is now expected to be solvent for seven years more than was predicted in 1998.

For several years, revenue flowing into Social Security Administration coffers has exceeded expenditures. This revenue derives mainly from a payroll tax levied on employees and employers, while expenditures cover Social Security benefit payments, most of which fund retirement benefits for people 62 years of age and over. Congressional legislation requires that any excess of revenue over expenditures be placed in a trust fund. For each year that revenue exceeds expenditures, this trust fund grows. Trust fund assets are held in the form of special issues of U.S. Treasury securities. These securities represent a future obligation of the U.S. Treasury to the trust fund. Indirectly, of course, future taxpayers will be obligated to meet these claims when the debt is redeemed.

TASK

  • Understand issues related to Social Security.
  • Explain near-term and long-term trends for the Social Security program.
  • Describe the relationship between debt and deficits.
  • Distinguish between a federal budget deficit and surplus.

PROCESS

Read "News Release: Social Security Trust Funds Gain Two Additional Years of Solvency ."

1. In what years are assets in the Social Security and Medicare trust funds now expected to be exhausted?

2. Why might this predicted extension of the longevity of the trust funds delay reform efforts for the two programs?

3. What were the revenues of the Old-Age and Survivors and Disability Insurance (OASDI) Trust Fund in 1998?

4. What were the expenditures of the OASDI Trust Fund in 1998?

5. What was the increase in assets of the OASDI Trust Fund in 1998?

6. What was the accumulated total value of the OASDI Trust Fund in 1998?

7. How many OASDI beneficiaries were there at the end of 1998?

8. How many workers contributed to OASDI in 1998?

9. Calculate the ratio of workers to OASDI beneficiaries at the end of 1998. 

Despite the 1999 balance of the OASDI Trust Fund (it is$762.5 billion) and the predictions that the balance will rise to $2327.2 billion by 2008, the long-term future of the fund looks uncertain. Current projections indicate that in 2014, Social Security expenditures will begin to exceed revenues. At that time, interest and assets in the trust funds will also be used to pay benefit claims. Ultimately trust fund assets will be drawn down until they are fully exhausted in 2034. At that time, payroll tax revenues will cover 71 percent of projected benefits liabilities. If this is allowed to happen, Social Security beneficiaries in 2034 will still receive benefit checks, but the checks will pay only a fraction of what had been promised. The key to understanding how this could happen is to realize that Social Security is not a fully funded, defined contribution public pension system. Instead, it can be thought of as a pay-as-you-go system of intergenerational transfers. This means that current beneficiaries can't be guaranteed that they will receive their benefits. Continued payment of these benefits depends in part on the willingness of the current generation of workers to tax themselves. And they in turn will depend upon workers in the next generation. This leads to the heart of the long-term funding problem. When the baby-boom generation (those born in the years 1946-1964) begins to retire, the ratio of workers to beneficiaries will begin to decline to a level that will not sustain the program at current benefits levels.

  1. Calculate the ratio of workers to OASDI beneficiaries in 2034 if the number of workers is projected to be 170,705 and the number of beneficiaries is projected to be 81,354.
     
  2. Calculate the projected percentage increase in workers from 1998 to 2034.
     
  3. Calculate the projected percentage increase in beneficiaries from 1998 to 2034.

The projected numbers of future workers and beneficiaries is taken from the 1999 OASDI Trustees Report .

It is demographic change that threatens the long-term solvency of Social Security. Increased life expectancies (despite an unchanged retirement age) and declining fertility rates have caused the worker-beneficiary ratio to decline to a dangerous level. These trends are not likely to change any time soon, although the retirement age is scheduled to increase gradually by two years during the first quarter of the 21st century. Thus, any improvements in the long-range outlook will have to derive from improved economic performance.

What economic factors are identified in the articles as having contributed to an improved outlook?

Why would these factors improve the Social Security outlook?

In the late 1990's Social Security surpluses had the effect of reducing the federal government budget deficit (or increasing its surplus). The reported Fiscal Year 1998 federal budget surplus of $69.2 billion would have been a deficit had it not been for a $99.3 billion OASDI surplus (for current information on the federal budget, go to Summary of Receipts, U.S. Budget 1999 ). This is important to note because OASDI surpluses are invested in U.S. Treasury securities. That is, unless there is an offsetting surplus somewhere else in the budget, the national debt will rise when OASDI is running surpluses. This explains how the gross federal debt can be increasing at a time when the federal government is reporting surpluses (the public debt was $5,526.2 billion on 9/30/98 and $5, 413.1 billion on 9/30/97; see The Debt to the Penny and Who Holds It ). A relatively recent phenomenon is for the federal government to have debt obligations to its own agencies. But whether a debt is owed to the general public or to a government agency, taxpayers are ultimately liable for paying it. So how can the national debt grow when the government reports a budget surplus? The OASDI surplus is included in the reported budget, despite the fact that OASDI balances are held in "untouchable" trust funds. Therefore, even though surpluses are being reported, the national debt is also rising. This trend has grown in recent years.

Read "Clinton's Newest Social Security Plan: From Bad to Worse ."

What is the author's criticism of former President Clinton's proposal for strengthening the Social Security system?

Despite an improvement in current projections regarding Social Security's economic future, the trust fund is still projected to be exhausted by 2034. Well before that date, in 2014, OASDI expenditures will outstrip income. By that time, significant reform measures will need to be in place to guarantee the payment of equitable benefits for future generations.