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169 IRET Congressional Advisory 1 (2004)

handle is hein.taxfoundation/iretcgadv0166 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 24, 2004 Advisory No. 169 SOCIAL SECURITY TRUSTEES REPORT: DEMOGRAPHICS, BENEFIT FORMULA, NOT COLAS, DRIVE BIG DEFICITS; GREENSPAN'S MISTAKE The 2004 Social Security Trustees Report was released on March 23. It 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 benefits that are more than twice the real benefits that current retirees receive? will pay some future upper income working couples almost $107,000 a year in real, inflation- adjusted benefits? will eventually pay most future two-earner retired couples more in Social Security benefits than the current median family income? will eventually require each working couple to support a retiree, due to demographic changes? All of this is true, and it is revealed in the various tables in the Trustees Report. These features of Social Security stem from its basic retirement benefit formula and the demographic changes confronting the System, which are the sources of its large projected deficits. The impact of the annual cost of living adjustment (COLA), which Federal Reserve Chairman Alan Greenspan has recently lamented, pales in comparison. 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).2 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.Fll. - Estimated Annual Scheduled Benefit Amounts for Retired Workers (OASDI Report, pp. 186-187.) The table (partially reproduced on the next page) shows the initial benefits that future generations are projected to receive when they first retire after they reach age 65 in future years, 2004 through 2080. (These are their basic starting benefits, determined by the benefit formula. These benefits will later be adjusted for inflation by the annual COLA, which is set by a different formula, and is a different issue.) The initial retirement benefits are displayed in the table 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 g~*m kfl S I 66~ 8 ~eg

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