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A weather vane for Social Security

Each year the Social Security trustees try to figure out where the system is heading. The imminent publication of the trustees’ annual report comes in the midst of a struggle over President Bush’s re-design proposal.
House Ways And Means Committee Holds Hearing On Social Security
Social Security trustees John Palmer, left, and Thomas Saving, center, chat with Comptroller General David Walker before a congressional hearing last week.Win Mcnamee / Getty Images
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Each year the Social Security trustees try to figure out where the system is heading.

The publication of the trustees’ annual report on Wednesday will come as Congress is struggling over President Bush’s proposal to give younger workers the option of putting some of their Social Security tax payments into private retirement accounts.

So this year’s report from the six trustees, who include Treasury Secretary John Snow and Social Security Commissioner Jo Anne Barnhart, will get closer scrutiny than the reports usually do.

The Social Security Administration’s actuaries use three different sets of economic and demographic assumptions in preparing the report. The one most often cited is the intermediate set which, according to their report last year, “reflects the Trustees' best estimate of the trust funds' future financial outlook” over the next 75 years.

Here are five variables to focus on in the soon-to-be-released report:

#1 The life-span issueLife-prolonging medical procedures put more pressure on Social Security. Since Social Security benefits are paid as a life-long annuity, it will make a substantial difference to the system whether people live to age 72 or to age 92.

In 1955, an American woman who survived to age 65 could be expected to live, on average, another 15.6 years.

But today a woman reaching age 65 will live another 19 years. By 2045, the trustees forecast, a 65-year old woman will live, on average, another 21 years, a forecast some demographers say underestimates future increases in longevity.

#2 How soon does the fiscal crunch come?
Sooner than you might think: in 2008, according to Comptroller General David Walker, the non-political appointee who is the government’s chief accountant.

Walker reminded Congress in testimony on March 9 that the excess cash now flowing into Social Security (about $65 billion in 2003) that is not needed to pay immediate benefits is being used to help pay for national parks, beef inspection, medical clinics for poor people, etc.

But due to an increasing number of retirees, that excess “will begin to decline in 2008, and by 2018, the cash surpluses will turn to deficits. Beginning in 2008, Social Security’s declining cash flow will begin to place increasing pressure on the rest of the budget.”

Whether the trustees push that 2008 crunch date forward or move it back in this year’s report, Walker’s warning remains valid. In about three years, the rest of the federal budget will begin to be pinched by Social Security’s declining cash surplus.

While the Social Security system holds $1.3 trillion in Treasury securities, “the trust fund doesn’t have any real money in it,” Social Security trustee Thomas Saving said in February. The securities in the trust fund are a promise to pay benefits, but they aren’t the cash needed to pay benefits.

In 2000, Saving, who teaches economics at Texas A & M University, was appointed by President Clinton to the trustee’s slot reserved for a Republican nominee. He supports private accounts within Social Security.

#3 How many immigrants will come to America?
Last year’s trustees report assumed an annual net immigration of 900,000 people, both legal and illegal, from 2025 until 2080.

“Ideally, illegal immigrants are the best,” Saving said. If they are on a payroll, they have fake Social Security cards and are paying Social Security taxes. “They’re great because they’re going to go back home and they’re never going to collect the money,” that is, the Social Security benefits they’d collect if they were legal.

In the long term, Saving said, “You have to remember that every other developed country is in at least as bad a shape as we are in, and most of them in worse shape, with their future labor force. Italy, France, Japan are going to need immigrants, we’re going to need immigrants, but where are they going to come from? We might have to make it a better deal for guest workers, we might have to say, ‘we’ll give you Social Security benefits if you come here.’”

#4 What will be the ratio of workers to retirees?
In 1955, there were 8.6 workers for every beneficiary, so the tax burden on each worker was relatively light: the Social Security tax on the employee then was only 1.5 percent of gross pay, compared to 6.2 percent today.

But in 2003, there were 3.3 workers for every Social Security beneficiary and by 2030, the trustees project the ratio of workers to beneficiaries will be only 2.2 — thus the tax burden on workers in 2030 would need to be heavier to pay the benefits promised to retirees.

This increasingly unfavorable worker-beneficiary ratio is non-political in its causes. It isn’t Franklin Roosevelt’s fault, or George W. Bush’s.

If one has to put the responsibility on any one person, pin it on Stanford University emeritus chemistry Professor Carl Djerassi, leader of the team that synthesized the first steroid oral contraceptive.

The Pill helped women have fewer children. In 1957, U.S. fertility was 3.7 births per woman during her lifetime. Twenty years later, with the Pill in wide use, the fertility rate was only 1.7.

The trustees said in last year’s report that recent trends “are consistent with a continued relatively low fertility rate,” which is currently about two births per woman during her lifetime.

#5 What is Social Security’s “actuarial balance”?
This number shows the system’s shortfall, the difference between its income and the benefits it pays out, expressed as a percentage of wage and self-employment income.

Over the next 75 years, the trustees said last year, the actuarial balance is a negative number, -1.89 percent of all wage and self-employment income. Lest that seem small, it amounts to about $4 trillion in current dollars, equal to one-third of this year’s total output of goods and services in the U.S. economy.

In a separate report, the Social Security actuary’s office has examined ways to make the system solvent over 75 years.

Raising payroll tax rates (both for employees and employers) by two percentage points (to 8.2 percent) would put the system in 75-year balance. So would making all earnings subject to the Social Security tax, instead of keeping the current cap under which only the first $90,000 of earnings are taxed. The cap, which goes up each year in line with increases in average wages, has risen by an average of 5.2 percent a year over the past 30 years.

Such steps, however, would only address the 75-year shortfall. At the end of the 75 years, taxes would need to be raised again, or benefits cut, or some of both.