Social Security's Future: Q&A
There is an important national discussion going on concerning the future of Social Security. Below are answers to some of the most frequently asked questions:
Social Security Benefits
Q: I am retired and receiving a monthly check from Social Security. Are my monthly payments going to be cut?
A: No, there are no plans to cut benefits for current retirees. In fact, benefits will continue to be increased each year with inflation.
Q: I'll be retiring in the next five to 10 years. Can I expect my presently scheduled benefits to be paid to me at retirement?
A: Many reform plans, including those put forth by the President's Commission to Strengthen Social Security, preserve scheduled benefits, including cost- of-living increases, for near-retirees. Depending on the proposal, a "near-retiree" is defined as someone aged 50 to 55 and older.
Q: My parents are receiving Social Security payments. Should I be worried that their monthly checks will be cut and that I will have to make up the difference?
A: No, there are no plans to reduce benefits for current retirees. In fact, benefits will continue to grow annually with inflation.
Q: I am receiving disability benefits from Social Security. Should I be worried that my monthly check will be cut?
A: Most plans, including those put forth by the President's Commission to Strengthen Social Security, do not reduce the benefits of currently disabled beneficiaries.
Q: I'm 35 years old. If nothing is done to improve Social Security, what can I expect to receive in retirement benefits from the program?
A: Unless changes are made, at age 73 your scheduled benefits could be reduced by 27 percent and could continue to be reduced every year thereafter from presently scheduled levels. See the Trustees Report
Q: I'm 25 years old. If nothing is done to change Social Security, what can I expect to receive in retirement benefits from the program?
A: Unless changes are made, when you reach age 63 in 2042, benefits for all retirees could be cut by 27 percent and could continue to be reduced every year thereafter. If you lived to be 100 years old in 2079 (which will be more common by then), your scheduled benefits could be reduced by 33 percent from today's scheduled levels. See the Trustees Report
Q: Should I count on Social Security for all my retirement income?
A: No. Social Security was never meant to be the sole source of income in retirement. It is often said that a comfortable retirement is based on a "three-legged stool" of Social Security, pensions and savings. American workers should be saving for their retirement on a personal basis and through employer-sponsored or other retirement plans.
Q: Does Social Security have dedicated assets invested for my retirement?
A: Social Security is largely a "pay-as-you-go" system with today's taxpayers paying for the benefits of today's retirees. Money not needed to pay today's benefits is invested in special-issue Treasury bonds.
Q: Is there really a Social Security trust fund?
A: Yes. Presently, Social Security collects more in taxes than it pays in benefits. The excess is borrowed by the U.S. Treasury, which in turn issues special-issue Treasury bonds to Social Security. These bonds totaled $1.5 trillion at the beginning of 2004, and Social Security receives more than $80 billion annually in interest from them. However, Social Security is still basically a "pay-as-you-go" system as the $1.5 trillion is a small percent of benefit obligations.
Social Security's Future
Q: I hear that Social Security has a big financial problem? Why?
A: Social Security's financing problems are long term and will not affect today's retirees and near-retirees, but they are very large and serious. People are living longer, the first baby boomers are five years from retirement, and the birth rate is low. The result is that the worker-to-beneficiary ratio has fallen from 16-to-1 in 1950 to 3.3-to-1 today. Within 40 years it will be 2-to-1. At this ratio there will not be enough workers to pay scheduled benefits at current tax rates.
Q: What will happen if Social Security is not changed?
A: If Social Security is not changed, payroll taxes will have to be increased, the benefits of today's younger workers will have to be cut, or massive transfers from general revenues will be required. Social Security's Chief Actuary states, "If benefits were reduced to meet the shortfall in revenue for the combined program, the reduction would need to be 27 percent starting with the exhaustion of the Trust Fund in 2042 and would rise to 32 percent for 2078. Alternatively, if additional revenue were provided beginning in 2042, revenue equivalent to a payroll tax rate increase of about 3.1 percentage points (from 12.4 percent under current law to about 15.5 percent) would be needed for the year. The additional revenue needed for 2043 would be equivalent to a payroll tax rate increase of about 4.5 percentage points for the year. Thereafter, the amount of additional revenue needed would gradually rise, reaching an amount equivalent to an increase in the payroll tax rate of about 5.9 percentage points for 2078 (or about 50 percent higher than today's rate). See the Trustees Report
Q: How big is the future problem?
A: Social Security is not sustainable over the long term at present benefit and tax rates without large infusions of additional revenue. There will be a massive and growing shortfall over the 75-year period.
Social Security's Chief Actuary projects that in present-value dollars the total net Social Security cash flow for years 2004 through 2078 is projected to be nearly -$5.2 trillion. When the trust fund balances of $1.5 trillion at the beginning of 2004 are added to this value, we get a financial shortfall (or unfunded obligation) for the 75-year period of $3.7 trillion. This unfunded obligation indicates that if an additional $3.7 trillion had been added to the trust fund at the beginning of 2004, the program would have had adequate financing to meet the projected cost of benefits scheduled in current law over the next 75 years. See the Trustees Report
Q: If Social Security's financial problem is so long term (negative cash flows not until 2018 and trust fund exhaustion in 2042), why do we need to fix it now?
A: As the Trustees of Social Security, the Comptroller General of the United States and the Chairman of the Federal Reserve Board have said, the sooner we address the problem, the smaller and less abrupt the changes will be. The independent, bipartisan Social Security Advisory Board has said: "As time goes by, the size of the Social Security problem grows, and the choices available to fix it become more limited." Addressing the problem now will allow today's younger workers planning for their retirement to have a better assurance of the future of Social Security. See the Trustees Report
Social Security Modernization
Q: What are the alternatives for modernization and reform?
A: The four basic alternatives that are being discussed -- singularly or in combination with each other -- are (1) increasing payroll taxes, (2) decreasing benefits, (3) using general revenues or (4) prefunding future benefits through either personal savings accounts or direct investments of the trust funds.
The independent, bipartisan Social Security Advisory Board examined many options that addressed Social Security's long-range solvency problem. Its July 2001 report [PDF] is available online.
Q: Does President Bush have a specific plan to modernize and reform Social Security?
A: No, but the President has established six guiding principles for any reform of Social Security:
- Preserve Social Security benefits for retirees and near-retirees
- Use Social Security surplus for Social Security
- Keep Social Security payroll taxes level
- Do not have the government invest Social Security funds in the stock market
- Preserve Social Security's disability and survivors insurance programs
- Create individually controlled, voluntary personal retirement accounts to augment Social Security
The bipartisan Commission he appointed put forward three models based on these principles. These models are in the process of being discussed, as are other alternatives
Q: Will Social Security be replaced by a private sector retirement plan ("privatization")?
A: No. There are no credible plans to replace Social Security as the foundation for the retirement of American workers.
Q: What is a voluntary personal retirement account?
A: There are many possible ways to structure personal accounts. Several proposals recommend that a personal savings account plan for Social Security be modeled after the federal government's Thrift Savings Plan. This very popular plan for federal employees and members of Congress allows a choice of five highly diversified, low-cost mutual funds. In the Thrift Savings Plan, no direct investments in individual stocks are allowed.
Q: I understand that some reform plans require larger transfers from general revenues to fund personal Social Security savings accounts. Is that true?
A: Yes. Many of the plans put forth, including those by the Commission and by some members of Congress, require significant transfers from general revenues. Depending on the underlying assumptions, these transfers generally range from less than $1 trillion to more than $2 trillion, in today's present-value dollars. However, it is also true that if no changes are made, revenue transfers totaling $3.7 trillion, in today's present-value dollars, would be needed to pay currently scheduled benefits over the next 75 years.
Q: Would a "lock box" fix Social Security's problems in and of itself?
A: No. As Social Security's Chief Actuary has stated, "The implementation of a Social Security 'lock box' would not alter the U.S. Treasury commitment and thus would have no direct effect on the future solvency of Social Security. However, if the effect of a 'lock box' were to require that the non-Social Security Federal budget be in balance or surplus for the years in which Social Security makes investments, then the amount of borrowing from the public might be reduced. In this case the difficulty of generating General Revenue for the redemption of Trust Fund investments in the future would likely be diminished."
Q: Social Security's future challenges are caused by the aging of our population. Do other countries have similar problems?
A: Yes. Most countries in Europe, as well as Japan, have more serious challenges than the U.S. Even some developing countries are starting to face up to the aging of their populations.
Q: What are these other countries doing to face their challenges?
A: Many of these countries have begun to prefund their social security plans. More than 20 countries, including Britain, Australia and Sweden, have established versions of personal accounts.