E. CONCLUSION

Under current law the cost of Social Security will increase faster than the program's income, because of the aging of the baby-boom generation, expected continuing low fertility, and increasing life expectancy. Based on the Trustees' best estimates, expenditures will exceed tax revenues starting in 2018 and throughout the remainder of the 75-year projection period. Social Security's combined trust funds are projected to allow full payment of benefits until they become exhausted in 2042. At that time annual tax income to the trust funds is projected to equal about 73 percent of program costs. Separately, the OASI and DI funds are projected to have sufficient funds to pay full benefits on time until 2044 and 2028, respectively. By 2077, however, annual tax income is projected to be only about two-thirds as large as the annual cost of the OASDI program.

Over the full 75-year projection period the actuarial deficit estimated for the combined trust funds is 1.92 percent of taxable payroll--slightly higher than the 1.87 percent deficit projected in last year's report. This deficit indicates that financial adequacy of the program for the next 75 years could be restored if the Social Security payroll tax were immediately and permanently increased from its current level of 12.4 percent (for employees and employers combined) to 14.32 percent. Alternatively, all current and future benefits could be immediately reduced by about 13 percent. Other ways of reducing the deficit include making transfers from general revenues or adopting some combination of approaches.

If no action were taken until the combined trust funds are exhausted in 2042, much larger changes would be required. For example, payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2042. In this case, the payroll tax would be increased to 16.94 percent at the point of trust fund exhaustion in 2042 and continue rising to 18.9 percent in 2077.

Similarly, benefits could be reduced in every year beginning in 2042. Under this scenario, benefits would be reduced 27 percent at the point of trust fund exhaustion in 2042, with reductions reaching 35 percent in 2077.

Changes of this magnitude would eliminate the actuarial deficit over the 75-year period through 2077. However, because of the increasing average age of the population, Social Security's annual cost will very likely continue to exceed tax revenues after 2077. As a result, ensuring the sustainability of the system beyond 2077 would require even larger changes than those needed to restore actuarial balance for the 75-year period.

The projected trust fund deficits should be addressed in a timely way to allow for a gradual phasing in of the necessary changes and to provide advance notice to workers. The sooner adjustments are made the smaller and less abrupt they will have to be. Social Security plays a critical role in the lives of over 46 million beneficiaries, and over 150 million covered workers and their families. With informed discussion, creative thinking, and timely legislative action, we will ensure that Social Security continues to protect future generations.


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2003 OASDI Trustees Report

2003 OASDI Trustees Report

E. CONCLUSION