The assets in Social Security’s trust funds are expected to be exhausted in 2033, three years earlier than last year’s estimate, according to the latest Social Security Board of Trustees' annual report. After that, there will only be enough revenue coming in to pay out about three quarters of promised benefits unless changes are made to the system. Here are the results of Social Security’s annual financial checkup:
Paying out benefits. The old-age and survivors insurance and disability insurance (OASDI) trust funds spent $736 billion in 2011, primarily paying out benefits to about 55 million people. Payments were provided to 38 million retired workers and their dependents, 6 million survivors of deceased workers, and 11 million disabled workers. It cost $6.4 billion to administer the program in 2011, or about 0.9 percent of total expenditures.
Worker contributions. An estimated 158 million people paid payroll taxes into the Social Security trust funds in 2011. Workers contributed $564 billion to the trust funds, and another $24 billion was added due to the taxation of benefits. Workers and employers typically each contribute 6.2 percent of pay to the Social Security system, up to the taxable maximum of $106,800 in 2011 and $110,100 in 2012. However, the worker contribution rate was temporarily reduced to 4.2 percent in 2011 and 2012.
The impact of the payroll tax cut. The temporary reduction in the Social Security payroll tax in 2011 resulted in about $103 billion being paid from the general fund of the Treasury into the Social Security trust funds. “The report also confirms that Social Security’s trust funds continue to grow and the payroll tax holiday has had no impact on the program’s solvency, as the Treasury has repaid all borrowed funds,” says Nancy LeaMond, executive vice president of AARP.
Investment income. The trust funds earned $114 billion in interest in 2011, an effective annual interest rate of about 4.4 percent. Assets held in special issue U.S. Treasury securities grew to $2.7 trillion in 2011 and are expected to continue growing to about $3.1 trillion by 2021.
Long-term deficit. Although the trustees project that the trust fund assets will be adequate to pay out benefits over the next two decades, there is a long-term funding shortage. “Social Security’s retirement and disability programs have dedicated funds sufficient to cover benefits for the next 20 years, but in 2033, incoming revenues and trust fund resources will be insufficient to maintain payment of full benefits,” says Timothy Geithner, Secretary of the Treasury. The assets in the Social Security trust funds are projected to be exhausted in 2033. At that time there will be enough tax revenue coming in to pay about 75 percent of scheduled benefits. “Congress needs to act to ensure the long-term solvency of this important program, and needs to act within four years to avoid automatic cuts to people receiving disability benefits,” says Michael Astrue, Commissioner of Social Security.
Changes needed. The trustees suggest several changes that could restore the program to solvency for the next 75 years. An immediate payroll tax increase of about 1.3 percent for both workers and employers would correct the projected deficit, as would immediately reducing benefits by 16.2 percent, or some combination of these two approaches. “Lawmakers would have to make significantly larger changes for future beneficiaries if they decide to avoid changes for current beneficiaries and those close to retirement age,” the report cautions. “If lawmakers do not take substantial action for several years, then changes necessary to maintain Social Security solvency will be concentrated on fewer years and fewer generations.” If Social Security changes are deferred until the trust funds become exhausted in 2033, it will then require a tax increase of 2.15 percent for both workers and employers to continue paying out benefits at current levels. Alternatively, benefit payouts would need to be reduced by 25 percent in 2033 if no tax increases or alternative revenue sources are implemented.