There has been a determined campaign for years by conservatives such as former Nixon Commerce Secretary and Wall Street billionaire, Pete Peterson to undermine the public’s confidence in Social Security. Therefore, it is necessary to periodically reassure working people that Social Security’s financial future is sound.
On January 26, 2011, the non-partisan Congressional Budget Office (CBO) released its 2011 “Budget and Economic Outlook”, including its projections for Social Security’s finances. Some background and context are necessary to understand the implications for Social Security contained in the report.
Social Security is social insurance that protects almost all working people and their families from disability and premature death and provides inflation proof retirement income when aging reduces their capacity for work. Its official name is Old Age, Survivors and Disability Insurance (OASDI). It is the most efficient and successful government anti-poverty program ever. Only 1 percent of benefit payments go to administrative costs. This compares with 12 to 14 percent for private insurance according to economists Dean Baker and Mark Weisbrot of the Center for Economic and Policy Research.
The source of Social Security’s revenue is a designated Federal Insurance Contribution Act (FICA) or payroll tax of 6.2 percent on both employers and employees. Thus, Social Security’s finances are considered “off budget” from the rest of the federal government’s spending which is labeled “on budget.” President Reagan signed into law the 1983 Greenspan Commission’s recommendations that gradually raised the FICA tax from 5.4 to its present 6.2 percent and the retirement age from 65 to 67 for those born after 1960.
One intended consequence of this payroll tax increase is that Social Security ran surpluses from 1985 until just last year. By contrast, the federal government ran “on budget” deficits every one of the last 50 years, except for surpluses in 1999 and 2000 at the end of President Clinton’s administration. If the federal government runs “on budget” deficits and Social Security runs “off budget” surpluses, then by law the latter must lend those surpluses to the government by buying Special Issue bonds. These bonds constitute Social Security’s Trust Fund. The $2.5 Trillion presently accumulated in Social Security’s Trust Fund resulted from decades of surpluses loaned to the federal government that helped finance the latter’s “on budget” deficits.
The federal government would have to borrow money from the Chinese or Arabs to finance its “on budget” deficits if it did not borrow Social Security’s surpluses. The federal government has the legal obligation to pay its foreign and Social Security creditors periodic interest and repay the principal when the bonds mature.
The primary determinant of Social Security’s revenue is the growth rate of the US’s constant price total output of final goods and services known as Real Gross Domestic Product (RGDP). RGDP fell sharply and then grew much slower than normal during the recent severe economic crisis. Thus, Social Security’s tax revenues fell below scheduled benefits in 2010 and in 2011. Consequently, Social Security redeemed some of the bonds in its Trust Fund to pay full benefits in 2010 and will do so again in 2011. All promised benefits will be paid from FICA tax revenue and this reimbursement arrangement until 2037 when the CBO predicts Social Security’s Trust Fund will be exhausted.
The CBO forecasts that if RGDP grows annually at approximately 2.5 percent, then in 2037 Social Security tax revenue alone will be able to pay 78 percent of promised benefits without any changes to the program. In terms of the goods and services that these 78 percent of benefits can buy, i.e., in what economists call “real” terms, benefits will be greater than 100 percent of those paid in 2011!
RGDP grew at an average annual rate of 3.4 percent over the last 80 years, including the Great Depression of the last century. If annual RGDP grows anywhere near this historic average for the next 27 years, then in 2037 and for long after, Social Security will pay 100 percent of promised benefits, again with no changes whatsoever to the program!
The strategy of those wishing to destroy Social Security is creating the impression that the program faces a crisis through a series of misleading headlines and dishonest commentaries. When people are frightened, they may be bullied into to acting against their own economic interests. They may be willing to accept radical changes to or even eliminate Social Security.
Those out to dismantle the program assert that it now needs benefit cuts and the retirement age increased so that these same changes are avoided in the future. Clearly, this is nonsensical doubletalk. The facts unambiguously validate Social Security’s financial health now and far into the future.