Read our related article on the Medicare and Medicaid trust funds in this week’s issue.

Like Medicare and Medicaid, Social Security is affected by the aging of baby boomers. Since benefits are paid by payroll taxes, Social Security funds are dependent on the size of the current workforce. As the number of retirees grows in relation to the number of current workers, Social Security faces problems.

Some projections remain optimistic. Unlike Medicare and Medicaid, which are predicted to become insolvent by 2012, the Social Security Board of Trustees believes the program is adequately financed under intermediate assumptions.

Why are these programs on two different trajectories? What drives the difference in projected growth rates for Social Security versus Medicare and Medicaid?

In 2007, almost 50 million Americans were receiving Social Security benefits, costing $585 billion in total benefits. The cost of Social Security will rise dramatically (see Table 1), says the Congressional Budget Office (CBO). The size of the Social Security budget is related to the size of the economy, as Social Security benefits tend to grow along with gross domestic product (GDP) and payroll taxes. Social Security is affected primarily by the aging population and its funds are depleted by rising technological or medical costs, as is the case with Medicare and Medicaid.

Table 1: Spending for Social Security, 1962 to 2050

Source

How Social Security is Funded

Social Security is funded by the Old-Age, Survivors, and Disability Insurance (OASDI) program, which provides retired Americans with monthly income and benefits. The OASDI program consists of two separate funds: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). To measure solvency, the Trustees calculate a trust fund ratio for each program. These ratios are expressed as a percentage of project cost for the upcoming year, and they represent the portion of cost that can be paid with available funds. When applying these tests, the Trustees assume that if the trust fund ratio is at least 100% at the beginning of the ten-year projection period, it must remain at or above 100% throughout the ten years. In addition, if the ratio is less than 100%, it must be projected to reach 100% within 5 years and remain above 100% for the ten-year period. If the funds do not pass these tests, the Trustees believe that they are insolvent.

Over the next ten years, the Trustees predict that both employment and average earnings will increase. With these increases, taxable earnings are also estimated to rise significantly. Since these earnings represent a large component of the trust fund’s assets, the combined OASDI trust fund is adequately financed. The combined assets of OASDI trust fund are estimated to increase from $2,238 billion (359% of annual expenditures) in 2008 to $4,273 billion (385% of annual expenditures) in 2017.

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