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151 IRET Congressional Advisory 1 (2003)

handle is hein.taxfoundation/iretcgadv0148 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. March 21, 2003 Advisory No. 151 SOCIAL SECURITY TRUSTEES REPORT: AN EYE-OPENER IF YOU KNOW WHERE TO LOOK The 2003 Social Security Trustees Report, released on March 17, contains a wealth of information, some of it quite surprising, about the future of the Old Age, Survivors, and Disability Insurance program (OASDI). Did you know that, in the face of impending insolvency, Social Security: is promising, over time, to pay future retirees more than twice the real benefits that current retirees receive? will pay some future upper income working couples almost $105,000 a year in real, inflation-adjusted benefits? will be giving most future two-earner retired couples more in Social Security benefits than the current median family income? will effectively require each working couple to support a retiree? All of this is true, and it is revealed to the careful reader of the various tables in the Trustees Report. Most people only look at two bits of data in the Trustees Report - the year the system will start running annual cash flow deficits (2018), and when it will run out of spending authority by exhausting its trust fund (2042).1 Serious students of Social Security should look beyond these cash flow and trust fund numbers to learn more of why the system is in trouble and what can be done about it. The excellent background material in the Report and its appendices can be of great help. Promised benefits are soaring in real value, and will more than double by 2080. Consider Table VI.F11. - Estimated Annual Scheduled Benefit Amounts for Retired Workers (OASDI Report, pp. 189-190.) The table (partially reproduced on the next page) shows the benefits that future generations are projected to receive after they reach age 65 in future years, 2003 through 2080. These benefits are displayed for people who earn various levels of wages relative to the rest of the population (low wage, average wage, high wage, and the maximum wage subject to the payroll tax). The benefits are presented in real inflation-adjusted dollars, and as a percent of pre-retirement income. They are shown for people who work until the normal retirement age (rising gradually from 65 to 66 and 67), or who retire at a fixed age of 65 in the years shown. It is often mentioned that the Social Security benefit formula is structured to provide all generations over time with about the same benefits relative to pre-retirement income. This is known as a constant replacement rate, and it is projected to be 55.3% for low wage workers (earning 45% of the average wage), 41% for workers who earn the average wage all their lives, 34% for high earnings workers (160% of average wage) and 27.3% for maximum covered wage workers, assuming they retire at the normal retirement age applicable for their age cohort. What many people do not realize, and what may come as a surprise or shock, is that these constant replacement rates actually mean that benefits will rise significantly over time as real wages grow. 8~em k3. S I g6~ I

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