Quick Facts on Social Security

Introduction

Information presented below is from the 2001 Annual Report of the board of Trustees of the Federal Old-Age and Survivors Insurance Trust Funds and NCPA calculations.

About Social Security

• Social Security provides retirement and disability insurance benefits for qualified workers and their dependents, as well as benefits for survivors of deceased workers.
• In 2000, Social Security provided survivors benefits for 38.5 million people and disability for 6.6 million. Meanwhile, 152.9 million workers contributed to the program.
• Social Security is a pay-as-you-go program, which means the government writes checks to today's beneficiaries using payroll taxes collected from today's workers.
• When Social Security began in 1935, the payroll tax on workers' salaries to support the program was 1% on the first 3,000 of income. Today, Social Security is financed by a 12.4 percent payroll tax - half by the employee and half by the employer - on the first $80,400.
• The average Social Security benefit in 2000 was $804 per month, or $9,648 per year, according to the American Savings Education Council.

Social Security is in Trouble

• The number of Social Security beneficiaries is growing faster than the number of workers paying taxes to support them - the number of elderly between now and 2050 will increase 100% while the number of will workers will only increase by 22%.
• People are living longer and collecting more Social Security benefit checks. In 1940, life expectancy was 61.4 for men and 65.7 for women. By 2000, life expectancy was 73.8 for men and 79.5 for women; by 2050, life expectancy will be 79 for men and 83.3 for women.
• People are having fewer children. For each generation to be the same size and the one before (the replacement rate), women must have 2.1 children. In 1940, the fertility rate was 2.23. Today, the rate is 2.07 and by 2050 it is expected to trend downward to 1.95.
• The result has been dramatic. In 1940, there were 42 workers per retiree. Today the ratio is 3-to-1; by 2050 it will be 2-to-1. The burden on each individual worker will increase substantially and we will no longer be able to keep out promises to retirees at current payroll tax levels.
• By 2016 Social Security will spend more in benefits than it collects in taxes. By 2040 the program will have spent all the assets credited to the trust fund - taxes will have to rise by half or benefits cut by a third.

The Trust Fund - Accounting Fiction?

• The real problem comes in 2016.
• Currently, payroll tax collections exceed benefit payments, and will continue to do so until 2016 when the program will spiral into annual deficits. This year, the surplus is projected to be $93 billion.
• Surpluses credited to the trust fund are not saved or invested; however. Rather, they are immediately borrowed by the government and spent on other priorities or used to pay down debt. All that remains in the trust fund are government IOUs.
• For the government to pay Social Security benefits in 2016, it must first raise taxes or reduce spending to generate the needed funds.

How to Fix the Problem

• In order to shore up Social Security's financial shortfall, the government must increase the program's income (raise taxes), decrease its expenses (reduce benefits) or find a new source of funding.
• One way to create a new funding source is to allow younger workers to invest a portion of their payroll taxes into a personal retirement account (PRA). Over time, the PRA balances - with their accumulated interest and dividends - would replace an increasing portion of retirees' Social Security benefits.