Social Security: Summary of Program Solvency and Projections

Social Security: Summary of Program Solvency and Projections

Order Code RS22139
Updated January 30, 2007
Social Security: Summary of Program
Solvency and Projections
Gary Sidor
Information Research Specialist
Knowledge Services Group
Summary
On May 1, 2006, the Social Security Board of Trustees released its annual report
to Congress on the status of the Social Security trust funds. The Social Security trust
funds, under the latest forecast, continue to face long-range financing problems. On a
combined basis, the Old-Age, Survivors, and Disability Insurance (OASDI) trust funds
are projected to be depleted in 2040 (which is one year earlier than the projection from
the 2005 report).1 At that point, annual tax revenue would cover only 74% of program
costs. Over the full 75-year projection period, the trust funds are projected to have an
actuarial deficit equal to 2.02% of taxable payroll (compared to 1.92% in last year’s
report), and program expenditures are projected to exceed income by an average of 15%.
This report will be updated annually, after the release of the annual report.
The Social Security Board of Trustees
Each year the Social Security Board of Trustees issues a report to Congress on the
operations and status of the Social Security trust funds. The six-member Board of
Trustees includes the Secretary of the Treasury, the Secretary of Labor, the Secretary of
Health and Human Services, the Commissioner of Social Security, and two public
representatives. Public Trustees are appointed by the President and confirmed by the
Senate for four-year terms. The Secretary of the Treasury serves as the Managing Trustee;
the Deputy Commissioner of the Social Security Administration is designated as the
secretary of the Board.
1 Any reference to the combined Social Security OASDI trust fund assumes the merged
operations of the separate federal Old-Age and Survivors Insurance (OASI) trust fund and the
federal Disability Insurance (DI) trust fund and treats them as if they were one collective
(OASDI) fund. In reality, the two trust funds have distinct dedicated primary revenue sources
in their respective portions of federal payroll taxes, and operate separately. The two trust funds
and their respective programs are closely linked, however, and collectively make up what is
commonly referred to as “Social Security.”

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Short-Range and Long-Range Projections
The Trustees traditionally report on both the short-range (10-year) and long-range
(75-year) operations of the OASI and DI trust funds. Since there is uncertainty in long-
term projections, the Trustees provide estimates based on three alternative sets of
economic and demographic assumptions: low cost (alternative I); intermediate cost
(alternative II), and high cost (alternative III). The intermediate projections represent the
Trustees’ “best estimate.” These intermediate projections are the projections used in
assessing the short-range adequacy of social security financing. While the three sets of
long-range projections highlight that there is uncertainty in these estimates, this approach
does not provide any indication of the probability that the future financial status of the
trust fund are within or outside the range of these estimates.
The standard long-range projection methodology (low-cost, intermediate, and high-
cost projections) uses a deterministic model of outcomes where certain assumptions are
made regarding important demographic and economic factors affecting the trust fund
balance. The deterministic model uses separate, specified assumed values for each of the
assumptions. In recent years, the annual report has begun to provide stochastic
projections that attempt to model the probability of alternative trust fund outcomes. The
stochastic approach is built on thousands of independent simulations where the value of
the assumptions are allowed to vary. The distribution of these simulation outcomes are
then used to determine: the probability of solvency occurring within a range of years; or
the probability of key trust fund indicators falling within a particular numerical range.
While the trustees report provides these stochastic estimates, they are found in an
appendix of the report and the model is viewed as being in its early stages of
development.
Summarizing the trust fund operations over a 75-year period may lead to
misperceptions about program sustainability for even longer periods. The trustees’ report
now includes some measures of trust fund obligations beyond the 75-year period which
assume that most of the demographic and economic trends continue indefinitely.
Summary measures of program obligations through an infinite horizon are now a part of
the trustees’ report. However, the focus of discussion surrounding the trustees’ report
is on trust fund estimates for the 75-year period using the intermediate assumptions. The
remainder of this report will highlight the current report findings using these intermediate
assumptions.
Understanding Trust Fund Financing
In July of 2006, Social Security provided cash benefits for 49 million Americans.
Over 162 million Americans paid taxes in support of those benefits. The combined
OASDI trust funds receive income from the payroll taxes workers pay on their wages and
self-employment income. A smaller amount is financed by part of the income tax some
recipients pay on their Social Security benefits. In addition, the trust fund receives
interest from its current assets. This income is used to pay for current benefits and
program administration. Income in excess of outgo is credited to the trust fund. These
trust fund assets are a primary indicator of the program’s financial status. The trustees’
report details these transactions and makes projections about future years’ transactions
and the status of the trust funds. When assets at the beginning of any year are equal to or

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in excess of expected expenditures, the trust fund is thought to have an ‘adequate’
balance. If this ratio of assets to expected expenditures reaches zero, the trust fund is said
to be insolvent. This means that fully-scheduled current law social security benefits could
not be provided without some infusion of additional revenues.2
Solvency
Under the intermediate forecast, the trustees project that, on a combined basis, the
balance of the Social Security trust funds will peak in 2026 but will be depleted in 2040,
one year earlier than estimated in last year’s report. Figure 1 illustrates the projected and
eventual decrease in Social Security holdings. Table 1 shows other important dates
related to trust fund financing under the intermediate projections. The DI trust fund by
itself is projected to become insolvent in 2025 and the OASI trust fund by itself is
projected to become insolvent in 2042. Because the OASI trust fund, as measured by
income, outgo and balances, is much larger than the DI trust fund — when all combined
(OASDI) operations are considered — the year of exhaustion converges at 2040.
Figure 1. Projected Balances of the Social Security Trust Funds,
Intermediate Projections, Calendar Years 2006-2040
$7,000
$6,000
$5,000
)
s
n
$4,000
io
ill
b
n
i
$3,000
($
Balances peak at $5.9 trillion in 2026
*Trust funds depleted in 2040
$2,000
$1,000
*
$0
2006
2010
2014
2018
2022
2026
2030
2034
2038
Source: The 2006 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds.
2 For a discussion of the legal rights of beneficiaries to full current law benefits when there is
trust fund exhaustion, see CRS Report RL32822, Social Security Reform: Legal Analysis of
Social Security Benefit Entitlement Issues, Kathleen Swendimen and Thomas Nicola.

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Table 1. Important Trust Fund Related Dates
2017
OASDI outgo exceeds tax income a
2027
OASDI outgo exceeds tax income + interest income a
2025
DI trust fund is exhausted
2040
OASDI trust funds are exhausted
2042
OASI trust fund is exhausted
Source: The 2006 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds.
a. Tax income (Social Security payroll tax and the income tax on benefits) is revenue from sources outside
the government. Interest income (interest earned on assets held by the trust funds) is paid by the
government to the government (that is, a transfer of funds from one government account to another).
Beginning in 2017, money will have to be drawn from the general fund of the Treasury to meet benefit
payments and administrative costs.
Under the intermediate forecast, the combined trust fund expenditures would begin
to exceed tax revenue in 2017 , as shown in Figure 2. Despite the tax revenue deficit at
this time, the combined trust fund assets continue to grow through 2026, bringing their
balance to slightly under $6 trillion.
Figure 2. Projected Income (Excluding Interest) and Outgo of the
Social Security Trust Funds, Intermediate Projections,
Calendar Years 2006-2040
Source: The 2006 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds.
This increase is the result of continued growth in the trust fund’s net interest. In
2027 and thereafter, the reserve balance would begin to be drawn down until the trust
funds assets do not fully cover expected costs in 2040. At that point, annual tax revenue
would be sufficient to cover only about 74% of program costs. Under the current law
projection, expected tax revenues would continue to decline as a share of program costs

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such that at the end of the 75-year projection period, 2080, these revenues would equal
just 70% of costs.
Over the full 75-year projection period, on average, trust fund expenditures are
projected to exceed income by 15%. Expressed another way, the long-range trust fund
deficit is projected to be 2.02% of taxable payroll (compared with 1.92% of taxable
payroll as projected in the 2005 report). The system’s long-range financing problems
reflect projected costs associated with the aging of the population (the first members of
the baby boom generation will reach early retirement age in 2008) and with projected
increases in life expectancy and decreases in birth rates. Over the next 25 years, the
number of people aged 65 and older is projected to increase by 90%. In contrast, the
number of workers whose taxes will finance future benefits is projected to increase by
only 14%. As a result, the number of workers supporting each recipient is projected to
decline from 3.3 today to 2.2 in 2030. After 2030, the ratio gradually declines even
further.
An additional way in which the trustees express the long-term concerns for the
program is by providing an estimation of how large a cash infusion would be needed to
retain solvency, in lieu of other reform options comprising of revenue increases or benefit
reductions. In the 2006 report, the trustees estimate that the present value of future
infusions necessary to keep the system solvent beyond 2040 to the end of the 75-year
long-range projection period would be $4.6 trillion. To sustain solvency for the infinite
horizon, the present value of future revenue infusions is much higher, $13.4 trillion.3
3 The present value calculations used to determine the size of the unfunded obligation of the trust
funds can be thought of as the lump-sum amount that, if invested today, given an assumed rate
of return, would grow to cover the program’s costs at the end of the projection period. These
types of measure attempt to account for the time value of money (interest earned) and are
dependent on the assumptions used in their calculation (i.e., the interest assumptions). It is not
a simple measure of the cumulative gap between trust fund income and outgo.