2006 Trustees Report: Section II.E, Conclusion

Under current law the cost of Social Security will soon begin to 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 estimate, program cost will exceed tax revenues starting in 2017 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 2040. At that time annual tax income to the trust funds is projected to equal about 74 percent of program costs. Separately, the OASI and DI funds are projected to have sufficient funds to pay full benefits on time until 2042 and 2025, respectively. By 2080, however, annual tax income is projected to be only about 70 percent 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 2.02 percent of taxable payroll-somewhat higher than the 1.92 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 14.42 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 become exhausted in 2040, larger changes would be required.

For example, payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2040. In this case, the payroll tax would be increased to 16.65 percent at the point of trust fund exhaustion in 2040 and continue rising to 17.78 percent in 2080.

Similarly, benefits could be reduced to the level that is payable with scheduled tax rates in each year beginning in 2040. Under this scenario, benefits would be reduced 26 percent at the point of trust fund exhaustion in 2040, with reductions reaching 30 percent in 2080.

Either of these examples would eliminate annual deficits after trust fund exhaustion. Because of the increasing average age of the population (due to expected improvement in life expectancy and continued low birth rates), Social Security's annual cost will very likely continue to grow faster than scheduled tax revenues after 2080. As a result, ensuring solvency of the system beyond 2080 would likely require larger changes than those expected to be needed for 2080.

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 this year's 49 million beneficiaries, and 162 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.

For further information related to the contents of this report, see the following websites.

2006 OASDI Trustees Report

E. CONCLUSION


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