The Center's work on 'Financial Status' Issues


Awaiting the 2014 Social Security Trustees’ Report

July 25, 2014 at 1:25 pm

Social Security’s trustees will release their annual review of the program’s finances on Monday, and while we’re not sure what the report will say, the trustees last year estimated that Social Security’s combined trust funds will be exhausted in 2033.  That was well within the range that the program’s trustees have projected in their reports for the past two decades (see table).

Even after the combined trust funds — the Old-Age and Survivors Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund — are exhausted, Social Security could still pay about three-fourths of scheduled benefits using its tax income, which is a fact that news stories often overlook.

Fluctuations from year to year in the trustees’ long-term estimates are normal.  A variety of demographic factors (such as fertility, mortality, and immigration) and economic variables (including wage growth, inflation, and interest rates) affect Social Security, and the actuaries constantly improve their methods.

Because of these fluctuations, revisions of a year or two, in either direction, are not a cause for alarm (or for celebration).  In fact, the trustees caution that their projections are uncertain.  For example, last year they judged that there was an 80 percent probability that trust fund exhaustion would occur sometime between 2029 and 2039 — and a 95 percent chance that it’d happen between 2028 and 2044.  More recently, the Congressional Budget Office (CBO) estimated that exhaustion would occur in 2030, largely because CBO expects somewhat faster improvements in mortality.  In short, all reasonable estimates show a manageable long-run challenge that needs to be addressed but not an immediate crisis.

The new report will note that the DI trust fund, which is legally separate from the much larger OASI trust fund, will need to be replenished sooner.  (Last year the trustees forecast that would be necessary in calendar year 2016; CBO projects that it’ll be necessary early in fiscal year 2017, which begins in October 2016.)  Traditionally, Congress has reallocated tax rates between the OASI and DI funds to address such challenges.  That’s why analysts usually focus on the outlook for the combined trust funds.

Legislators should boost DI’s share of the payroll tax by 2016 to avert a harsh and unnecessary cut in benefits to its severely impaired recipients.  And policymakers should work on a balanced package of Social Security reforms that achieves overall long-term solvency while preserving and even strengthening the program’s vital role in protecting breadwinners and their families.

You can find our analysis of last year’s report here, and our other Social Security analyses here.

We’ll be back on Monday with our initial reaction to the new Social Security and Medicare reports.

New Chart Book Paints Picture of Disability Insurance

July 21, 2014 at 1:53 pm

The Senate Finance Committee will hold a hearing this Thursday on Social Security Disability Insurance (DI).  We’ve just released a new chart book about DI.  Its more than 20 figures illustrate the essential facts and dispel some common misperceptions about this vitally important program.

For example, the following graph shows how growth in DI’s benefit rolls has slowed sharply.

The growth in the number of DI beneficiaries in recent decades stems largely from well-known demographic factors.  These include the growth of the population; the aging of the baby boomers into their 50s and 60s, which are years of peak risk for disability; growth in women’s labor force participation, which makes women much more likely to earn insured status for DI; and the rise in Social Security’s full retirement age from 65 to 66.

Both demographic and economic pressures on DI are easing.  In recent months, growth in the number of DI beneficiaries has slowed to its lowest rate in 25 years.  Social Security’s actuaries project that the program’s costs will level off as the economy continues to mend and baby boomers move from the disability rolls to the retirement rolls.

DI costs are projected to exceed revenues, however, and the program’s trust fund needs to be replenished in 2016.  Unless Congress increases the share of the Social Security payroll tax devoted to DI, beneficiaries would then face a 20 percent cut in benefits.

Reallocation between the DI trust fund and Social Security’s much larger Old-Age and Survivors Insurance (OASI) fund is a traditional method of addressing shortfalls in one program, and Congress should do so to avoid a harsh and unacceptable cut in benefits for an extremely vulnerable group.

For the full chart book, click here.

Congress Needs to Boost Disability Insurance Share of Payroll Tax

July 17, 2014 at 2:29 pm

Congress should increase the share of the Social Security payroll tax that’s devoted to Disability Insurance (DI) and reduce the share allocated to Old-Age and Survivors Insurance (OASI).  We explain in a new paper why that’s essential to avoid a 20 percent across-the-board cut in DI benefits in 2016, how Congress has reallocated payroll tax revenues many times in the past, and that reallocation has not been controversial.

The current Social Security tax is 6.2 percent of wages up to $117,000 in 2014, which both employers and employees pay.  Of this total, 5.3 percent of covered wages goes to the OASI trust fund, and 0.9 percent goes to the DI trust fund.

Traditionally, lawmakers have divided the total payroll tax between OASI and DI according to the programs’ respective needs.  Congress has reallocated payroll tax revenues many times — sometimes from OASI to DI, sometimes in the other direction — to maintain the necessary balance.

The current allocation reflects policymakers’ decision in 1994, when they last reallocated taxes between the programs.  The 1994 reallocations only partly mitigated the effects of the 1983 Social Security amendments, which slightly raised DI’s cost and cut DI’s share of the payroll tax.

Lawmakers expected that the 1994 reallocations would keep DI solvent until 2016.  Despite fluctuations in the meantime, current projections still anticipate that the trust fund will be depleted in 2016 as forecast.

DI’s anticipated trust fund depletion does not indicate that the program is out of control or that it’s “bankrupt;” that is, if the trust fund were depleted and policymakers took no action, the program could still pay about 80 percent of benefits.  But, at the same time, cutting benefits by one-fifth for an extremely vulnerable group of severely disabled Americans is unacceptable.

Ideally, Congress would address DI’s finances in the context of legislation to restore overall Social Security solvency, as we’ve previously pointed out.  But even if policymakers make progress toward a well-rounded solvency package before late 2016, which seems unlikely, any changes in DI benefits or eligibility would surely phase in gradually and hence do little to replenish the DI fund by 2016.  Consequently, reallocating payroll tax revenues between the two programs would still be necessary.

There is nothing novel or controversial in such a step, and failing to take it would be irresponsible.

Click here to read the full paper.

Social Security Administration Confirms 1.5 Percent COLA

October 30, 2013 at 12:15 pm

The Social Security Administration (SSA) announced today that the 2014 cost-of-living adjustment (COLA) will be 1.5 percent, smack in the middle of the range that we estimated yesterday.

The taxable maximum — that is, the maximum earnings on which workers and their employers will pay Social Security taxes — will be $117,000 in 2014.  The taxable maximum is indexed to growth in average wages, which is computed based on over 150 million W-2 reports.  Next year’s $117,000 ceiling is slightly higher than we expected and indicates that growth in average wages in 2012 was a bit greater than the SSA actuaries and the Congressional Budget Office estimated earlier this year.

Many features of Social Security are automatically linked to prices or wages and will rise in 2014.  For a complete update, see the table here.

What to Expect From Wednesday’s 2014 COLA Announcement

October 29, 2013 at 3:12 pm

The Labor Department will announce the Consumer Price Index (CPI) for September 2013 tomorrow — the last missing piece that’ll determine the January 2014 cost-of-living adjustment (COLA) in Social Security.  The department would normally have announced the CPI on October 16, but — like many other economic indicators — it fell victim to the government shutdown.

The COLA for Social Security and several other programs — including Supplemental Security Income, federal civil-service and military retirement, and payments to disabled veterans — is pegged to the CPI in the July-September quarter.  Based on what we know, we expect the upcoming COLA to be between 1.4 percent and 1.6 percent.  (See table.)  That’d be just a hair smaller than last January’s COLA.

Social Security COLAs have a long history:  Congress voted overwhelmingly in 1972 to pay them beginning in 1975, pegged to the CPI for Urban Wage and Clerical Workers (the CPI-W), which tracks inflation for an average consumer.  Automatic COLAs were paid in every year from 1975 through 2009.  In 2010 and 2011, there were no COLAs because prices had dropped from their peak in summer 2008.  (Fortunately for recipients, their benefits didn’t go down even when prices fell.)  Once prices surpassed their summer 2008 level, COLAs resumed.

For an average beneficiary, we expect the COLA to mean an extra $18 per month.  In added good news, the government has announced that premiums for Medicare Part B — which covers doctor and outpatient services — will remain flat in 2014.  Because most elderly or disabled Social Security beneficiaries enroll in Medicare Part B and have the premium deducted from their monthly check, that means the entire COLA will go toward boosting their monthly check.

In 2013, workers and their employers pay Social Security tax on earnings up to $113,700.  That taxable maximum will also rise in 2014.  Because of rising inequality, that ceiling now encompasses about 83 percent of covered earnings, well below the 90-percent target that policymakers envisioned in the 1977 Social Security amendments.

Social Security benefits are modest, both in dollar terms (the average retired worker gets about $1,270 a month, and only 9 percent receive more than $2,000 a month) and by international standards.  They’re the foundation of retirement income — and they also provide essential protection for workers who become disabled and to families of workers who die young.

For most Americans, Social Security will be the only source of retirement income that’s guaranteed to last as long as they live and to keep pace with inflation.  It’s vital for policymakers to keep those protections as they work to ensure this popular program’s long-run solvency.