Social Security is a social insurance program officially called “Old-age, Survivors, and Disability Insurance” (OASDI), in reference to its three components. It is primarily funded through a dedicated payroll tax. During 2012, total benefits of $786 billion were paid out versus income (taxes and interest) of $840 billion, a $54 billion annual surplus. Excluding interest of $109 billion, the program had a cash deficit of $55 billion. Estimates of lost revenues due to the temporary payroll tax cuts of 2011 and 2012 were offset by transfers of other government funds into the program; this was $114 billion in 2012. An estimated 161 million people paid into the program and 57 million received benefits in 2012, roughly 2.82 workers per beneficiary.
Reform proposals continue to circulate with some urgency, due to a long-term funding challenge faced by the program. Starting in 2011 and continuing thereafter, program expenses were expected to exceed cash revenues, due to the aging of the baby-boom generation (resulting in a lower ratio of paying workers to retirees), expected continuing low birth rate (compared to the baby-boom period), and increasing life expectancy. Further, the government has borrowed and spent the accumulated surplus funds, called the Social Security Trust Fund.
At the end of 2012, the Trust Fund was valued at $2.7 trillion, up $54 billion from 2011. The Trust Fund consists of the accumulated surplus of program revenues less expenditures. In other words, $2.7 trillion more Social Security payroll taxes have been collected than have been used to pay Social Security beneficiaries; the program has more than fully funded itself. The fund contains non-marketable Treasury securities backed “by the full faith and credit of the U.S. government.” The funds borrowed from the program are part of the total national debt of $16.8 trillion as of April 2013.
Program payouts exceeded cash program revenues (i.e., revenue excluding interest) in 2011; this shortfall is expected to continue indefinitely under current law. Due to interest, the Trust Fund will continue increasing through the end of 2021, reaching a peak of approximately $3.0 trillion. Social Security has the legal authority to draw amounts from other government revenue sources besides the payroll tax, to fully fund the program, while the Trust Fund exists. However, payouts greater than payroll tax revenue and interest income over time will liquidate the Trust Fund by 2033, meaning that only the ongoing payroll tax collections thereafter will be available to fund the program. There are certain key implications to understand under current law, if no reforms are implemented:
Payroll taxes will only cover about 75% of the scheduled payout amounts from 2033-2086. Without changes to the law, Social Security would have no legal authority to draw other government funds to cover the shortfall.
Between 2022 and 2033, redemption of the Trust Fund balance to pay retirees will draw approximately $3 trillion in government funds from sources other than payroll taxes. This is a funding challenge for the government overall, not just Social Security.
The present value of unfunded obligations under Social Security was approximately $8.6 trillion over a 75-year forecast period (2012-2086). In other words, that amount would have to be set aside in 2012 so that the principal and interest would cover the shortfall for 75 years. The estimated annual shortfall averages 2.5% of the payroll tax base or 0.9% of gross domestic product (a measure of the size of the economy). Measured over the infinite horizon, these figures are $20.5 trillion, 3.9% and 1.3%, respectively.
The annual cost of Social Security benefits represented 5.0% of GDP in 2011. This is projected to increase gradually to 6.4% of GDP in 2035 and then decline to about 6.1% of GDP by 2055 and remain at about that level through 2086.
Former President George W. Bush called for a transition to a combination of a government-funded program and personal accounts (“individual accounts” or “private accounts”) through partial privatization of the system. President Barack Obama “strongly opposes” privatization or raising the retirement age, but supports raising the annual maximum amount of compensation that is subject to the Social Security payroll tax ($110,100 of compensation in 2012, and $113,700 in 2013) to help fund the program. In addition, on February 18, 2010, President Obama issued an executive order mandating the creation of the bipartisan National Commission on Fiscal Responsibility and Reform, which made ten specific recommendations to ensure the sustainability of Social Security.