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223 IRET Congressional Advisory 1 (2007)

handle is hein.taxfoundation/iretcgadv0220 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. April 25, 2007 Advisory No. 223 2007 SOCIAL SECURITY TRUSTEES REPORT: EYE-POPPING BENEFIT SURGE DRIVING INSOLVENCY The 2007 Social Security Trustees Report, released by the Social Security Administration on May 23, contains some surprising information 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 $125,000 a year in real benefits (2007 inflation-adjusted dollars)? * will be giving most future 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 2007 OASDI Trustees Report. Most people only look at two bits of data in the Trustees Report - the year the system's benefit payments will exceed its tax revenues, creating cash flow deficits (2017), and when it will run out of spending authority by exhausting its trust funds (2041).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 2085. Consider Table VI.F10. - Estimated Annual Scheduled Benefit Amounts for Retired Workers (OASDI Report, pp. 186-187.) The table (partially reproduced on the next page) shows the benefits that future generations are projected to receive after they retire in future years, 2007 through 2085. 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) 2007 dollars, and as a percent of pre-retirement income. They are shown here for people who work until normal retirement age (rising gradually from 65 to 66 and 67), and are also available in the Report for people who retire at a fixed age of 65 in the years ahead. 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 ultimately projected to be 55.3% of the wage in the year before retirement 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 g~*m k3. A * ~ 66~ I ~6I

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