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Social Security fund may run out sooner
New trustees report: Latest estimates move up by one year date for trust fund exhaustion.
March 23, 2005: 5:22 PM EST
By Jeanne Sahadi, CNN/Money senior writer
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NEW YORK (CNN/Money) The Social Security trustees, in their 2005 report released Wednesday, offered an earlier date for trust fund exhaustion and revised upward estimates of the shortfalls facing the system over the next 75 years.

They also revised upward the shortfall facing the system over what's known as the infinite time horizon, a measure often used by the Bush administration to emphasize the system's troubles but which the nonpartisan American Academy of Actuaries deems "less reliable."

Based on revised assumptions, the trustees now estimate that by 2041 the system's trust fund will be exhausted, meaning the system will only be able to pay out a percentage of the benefits currently promised. In this case, the trustees estimate the system will be able to pay out 74 percent of benefits.

In their 2004 report, the trustees estimated the trust fund would be exhausted in 2042.

They also now estimate that by 2017 the system will not be taking in enough in payroll taxes to pay all benefits promised and will need to tap the special-issue bonds that make up its trust fund. That date was moved up from 2018.

The amount of the shortfall facing the system over the next 75 years was revised upward to $4 trillion from $3.7 trillion.

One way to measure that shortfall is to calculate how much you would need to raise payroll taxes to keep the system solvent for the next 75 years. Based on the latest numbers, the payroll tax would have to be raised 1.92 percentage points to 14.32 percent of wages. Currently, the payroll tax rate is 12.4 percent, half of which is paid by employers and half by employees.

Another way to measure it is in terms of benefits, which would need to be cut by 13 percent to achieve solvency over 75 years.

Over the infinite time horizon, the trustees now estimate the system will have an unfunded obligation of $11.1 trillion, up from the $10.4 trillion estimated in 2004.

But the increase is almost negligible since the $10.4 trillion represents 2004 dollars and the $11.1 trillion represents 2005 dollars. In fact, the change is economically insignificant. As a percentage of future payroll, both numbers represent 3.5 percent of future taxable payroll. And they each represent 1.2 percent of future GDP, according to the trustees report.

What's more, a shortfall measured over an infinite time horizon has limited value to policymakers, according to the nonpartisan American Academy of Actuaries. "Many observers question the reliability or usefulness of calculating Social Security's unfunded obligation over 75 years. Calculations over an infinite period are even less reliable," an Academy report noted.

Are the changes a big deal?

That the date for trust fund exhaustion has changed by a year is not surprising, given that the trustees annually reassess their assumptions and the long-term averages they use, based on the latest economic numbers.

Due to the effects of compounding over a long time horizon, "making tiny changes (in assumptions) can result in a two-year difference 40 years out," said actuary Bruce Schobel. "But that's not a fundamental change in the picture."

From 1979 to 1988, Schobel served as an actuary and senior advisor for policy at the Social Security Administration. Currently, he is chairman of the Social Security committee for the American Council of Life Insurers.

The Social Security Administration, in a release about the trustees' findings, characterized the new numbers as evidence of "little change in the Social Security solvency."

Four of the six Social Security trustees are members of the president's administration, who are appointed because of their position in the federal government: They are: John Snow, treasury secretary; Elaine Chao, labor secretary; Mike Leavitt, secretary of health and human services; and Jo Anne B. Barnhart, commissioner of Social Security.

In addition, there are two outside trustees appointed by the president: economists John Palmer, and Thomas R. Saving, who also served on the president's Commission to Strengthen Social Security.

The debate over Social Security reform has been highly politicized and contentious. At issue are when and how to make the system solvent and whether to add individual investment accounts, which President Bush favors. The accounts, however, do not aid solvency.

"There is no painless way to solve Social Security's solvency problems," said Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries, in a statement.

The solution, he noted, will require reductions in benefits, increases in taxes or some combination of the two.

New Medicare estimates

The trustees' report also addressed the financial problems in Medicare, which are more severe and more immediate than those of Social Security.

According to the report, the Medicare trust fund will be depleted in 2020, rather than 2019 as estimated last year.

Medicare, the government's program to provide health care to the elderly, is expected to pay out more in benefits in 2005 than it receives in tax revenues, as it did in 2004.

The financial health of the programs, in particular Social Security, has moved center stage in U.S. politics as a wave of retirement looms for the aging U.S. population and as health care costs mount.

In December 2004, 47.6 million people were receiving benefits under Social Security programs and 41.7 million were covered under Medicare, the trustees said.

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Note: Reuters contributed reporting to this article.  Top of page


Social Security Administration
George W. Bush
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