The Real Social Security Statement

October 29, 1999

The Social Security Administration has begun sending out the new "Social Security Statement," which purports to tell American workers how much they can expect to receive in retirement benefits from Social Security. In effect, the Social Security Statement says to workers, "If you earn this much and work to this age, you'll receive this much in benefits when you retire."

But the Social Security Statement is next to useless as a financial planning tool because its benefit estimates are based upon what Social Security promises, not what it can pay. What the Social Security Statement fails to mention is that unless taxes go up or the retirement age is increased, promised benefits simply cannot be paid.

But there is a way to salvage some value from the Social Security Statement. Based upon Social Security Administration projections, the Cato Institute has constructed two charts against which a person can compare the taxes and benefits listed on his own Social Security Statement to find out what Social Security can really pay.

"Wanda Worker"

A good way to illustrate how the Social Security Statement does (and does not) work is to look at the case of "Wanda Worker," a fictional statement recipient designed by the Social Security Administration. Wanda was born in 1960 and earns $30,364 per year. The Statement estimates that if she earns the same salary for the rest of her career, Wanda could retire at age 62 with a monthly benefit of $746 (in 1999 dollars), at 67 with a monthly benefit of $1,096, and at 70 with a benefit of $1,365.

By examining Wanda's case, we see how deceptive the Social Security Statement really is. But we can also see how to make a real estimate of what Social Security can pay.

Benefits

Chart A shows the Social Security system's funding deficit or surplus as a percentage of benefits, using the Social Security Administration's "intermediate cost" and "high cost" estimates of economic and demographic changes affecting the program.

Two points are worth making at the outset. First, why are there two lines on the charts? In estimating future costs, the Social Security Administration creates three sets of estimates: high cost, intermediate cost, and low cost. The intermediate cost estimates are those the SSA believes most likely to be accurate. However, other experts, such as the non-partisan Concord Coalition, believe the intermediate cost estimates to be over-optimistic. These experts believe that the high cost estimates are more likely to be accurate. (Almost no one believes the low cost estimates are likely to prove correct; for this reason, they are not included.)

Second, why does Chart A show that Social Security is currently able to pay 118 percent of benefits? What this means is that Social Security today takes in more payroll taxes than it needs. These surplus taxes are not added to benefits. Instead, they are spent on general government expenditures with a promise placed in the Social Security Trust Fund to pay them back in the future.

What can this chart tell us about Wanda Worker? Let's assume that Wanda works until age 67, the normal retirement age, at which point Social Security would pay her $1,096 per month.

Or would it? According to Chart A, which is based upon the Social Security Administration's own projections, in 2027 Social Security will take in only enough payroll taxes to pay between two-thirds and three-quarters of promised benefits. In other words, based upon current payroll tax rates Wanda can expect to receive only between $735 and $834, far less than she has been promised. And there is no indication on the Social Security Statement that her benefits would have to be cut by so much.

Making matters worse is that Wanda's benefits would decline each year. As Social Security's financial situation worsens, the system would be able to pay less and less of Wanda's benefits. So by 2037, when Wanda is 77 years old, her monthly benefits would fall to $670-791, while by the time Wanda turns 87 her monthly benefit could fall as low as $644 under SSA's high cost estimates.

Finding Your Benefits

To estimate the true amount of benefits Social Security is capable of paying you, first find the year in which you retire on the chart. Then deduct from the benefits promised you in your own Social Security Statement the percentage of benefits the chart shows to be unfunded. This is how much Social Security can pay you without any increase in payroll taxes. But remember, it is only valid for the year in which you retire. For each following year, you would need to adjust the benefit estimate downward to reflect Social Security's worsening financial position.

Taxes

In the first section we focused on the benefit side. But you can also look at Social Security from the tax side. Instead of asking how much benefits your current taxes will provide, you can determine how much taxes would have to rise in order to pay the benefits you've been promised.

Chart B shows that today's payroll taxes could be cut, because Social Security is currently running a surplus. By 2037, however, taxes would have to rise by 28-39 percent if promised benefits are to be paid.

What does this mean in practice? Today's payroll tax rate is 12.4 percent of wages and salary. Wanda Worker retires in the year 2037, at age 67. To pay the $1,096 dollar monthly benefit she has been promised, workers in 2037 would have to see their total Social Security tax burden increase to between 15.9 and 17.2 percent of their wages.

As with the Chart A, the level of taxes necessary to pay promised benefits increases over time. By the time Wanda is 77, taxes would need to rise to between 15.8-17.6 percent of wages. By age 87, the high cost estimates show taxes might have to rise as high as 18.1 percent.

Find the Tax Rate Needed to Pay Your Benefits

To find the payroll tax rate that must be paid by future workers to deliver the benefits promised you in your Social Security Statement, simply find the year in which you retire. The intermediate and high cost estimates show how much taxes must increase by. For each following year, tax rates might have to increase again in order to maintain full payment of your benefits.

What these numbers don't show, however, is whether future workers will be willing to pay those extra taxes. At 12.4 percent, payroll taxes are already too high, crowding out any personal savings many workers wish to make. Would future voters be willing to see increases in their payroll tax rates of up to 50 percent? Perhaps, but perhaps not. That is part of the risk involved with a pension system linked to the political process.

Conclusion

The new Social Security Statement has been advertised as a useful financial planning tool. By itself, it is not worth much. But a little digging into Social Security Administration projections provides a more accurate view of what Social Security can really pay. It's not good news. But it may provide the impetus to move to a privatized program based on personal retirement accounts that can really pay the benefits it promises.

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