This paper enumerates the flaws in a recent study by the Social Security Administration that relied on questionable assumptions to conclude that a projected shortfall in Social Security in 2042 would double the senior poverty rate from 2 to 4 percent.

Dean Baker

Mark Weisbrot

English

Research Papers in Economics

 
 
 
 
 
 
cepr        
Center for Economic and Policy Research    
 
 
Briefing Paper 
 
 
 
 
 
 
 
 
Growing the Social Security Crisis: 
The Social Security Administration’s Poverty Rate 
Projections 
 
By Dean Baker and Mark Weisbrot
1 
 
 
 
January 18, 2005 
 
CENTER FOR ECONOMIC AND POLICY RESEARCH   1611 CONNECTICUT AVE., NW, SUITE 400  
WASHINGTON, D.C. 20009    (202) 293-5380   <WWW.CEPR.NET>   EMAIL: CEPR@CEPR.NET 
  1
                                                 
1 Dean Baker and Mark Weisbrot are co-directors of the Center for Economic and Policy Research. The Social Security Administration (SSA) recently examined the impact on the elderly 
poverty rate if the program failed to pay full benefits after the trust fund is projected to be 
depleted in 2042.
2 The SSA analysis (by Andrew G. Biggs) found that if benefits were 
cut to the level that could be paid from projected tax revenue (approximately 73 percent 
of scheduled benefits), then the poverty rate among people who will be age 64 to 78 at 
the time, would double from 2.0 percent to 4.0 percent. 
 
While this finding is highlighted in the summary, there are several factors that should be 
noted in assessing its importance. 
 
1)  In its baseline projections of income, the model assumed that there would be no 
narrowing of the gap in income between men and women over the years 2022 to 
2038; 
2)  Its baseline projections of income also assume no narrowing of the income gap 
between non-whites and whites over this 16 year period; 
3)  The base year for the Biggs analysis is 2039, the year that the trust fund was projected 
to be depleted in the 2001 trustees' report. The most recent trustees' report projects 
that the fund won’t be depleted until 2042. Since the 2004 report also assumes more 
rapid wage growth, benefits projected for 2042 will be approximately 7 percent 
higher on average than the benefits projected in this analysis; 
4)  The analysis assumes proportionate benefit cuts, implying that Congress both does 
nothing ever to improve the finances of the program, and that it allows the poor to 
bear the same share of the cuts as the wealthy; 
5)  Even accepting all of the above assumptions in the Biggs paper, the size of the 
poverty gap created by the paper's projected benefit cuts would be a tiny fraction of 
the total federal budget at the time (approximately 0.02 percent); 
The dollar amount of this poverty gap is equal to the President's tax cut over a 16 
hour period. 
6)  The projected benefit cuts examined in the Biggs paper are actually smaller than the 
cuts that would be imposed by Plan 2 from President Bush’s Commission to 
Strengthen Social Security, on average. 
 
When these factors are taken into account, the study’s key finding appears to be far less 
consequential. 
 
Race- and Gender-Based Income Differences 
 
Taking the items in turn, the study is quite explicit in describing the modeling exercise. It 
assumes that “there is no progress in closing the income gaps between men and women 
or whites and non-whites over the next 16 years [2022-2038]." This assumption is very 
important to the analysis because the projected poverty rate for women is 60 percent 
higher than the poverty rate for men. The poverty rate for Hispanics is more than three 
times the projected poverty rate for whites and the projected poverty rate for blacks is 
                                                 
2 Biggs, A. (2004). “The Distributional Consequences of a ‘No-Action’ Scenario,” Social Security 
Administration, Policy Brief No. 2004-01 [http://www.ssa.gov/policy/docs/policybriefs/pb2004-
01.html#mn6]. 
  2almost five times the projected rate for whites.
3 If women and non-whites continued to 
make progress in closing the wage gap with whites, then their poverty rates would be 
considerably lower by 2039, both with and without the projected cut in benefits. While 
the decline in poverty rates may be partially offset by an increase in poverty rates among 
whites, it is likely that the net effect of further reduction in gender- and race-based 
differences in income would be lower poverty rates overall. 
 
In the sixteen years from 1985 to 2001, the Census Bureau reports that the ratio of the 
median income for women to the median income for men rose from 44.2 percent to 57.1 
percent.
4 Over the same period, the median income for blacks as a share of white income 
rose from 65.3 percent to 82.2 percent. For Hispanics, this ratio rose from 45.5 percent in 
1985 to 74.5 percent in 2001. It would be reasonable to expect that the trends toward 
diminishing gender- and race-based income gaps would continue, barring a change in 
policy. If, in fact, policy does change in this period, so that the progress in diminishing 
these gaps comes to a halt, this would likely be viewed as a far more serious crisis then 
the increase in elderly poverty projected in the Biggs paper.  
 
On a related topic, it is worth noting that President Bush has often argued that Social 
Security is unfair to blacks because they have shorter life expectancies than whites, and 
therefore do not collect benefits for as many years on average. While the same logic 
applies to any annuity-type program that ensures retirees do not outlive their retirement 
income – including one based on private accounts – this argument is similar to the one 
presented in these poverty projections.  
 
President Bush apparently objects to annuities because blacks don’t live as long as 
whites, and this study shows that backs will be far more vulnerable than whites to a cut in 
Social Security benefits, because they will have made little progress in closing the 
black/white income gap. One policy approach would be a renewed emphasis on efforts to 
close the racial gap in life expectancy and income. However, the direction of President 
Bush’s comments, like the assumptions in these projections, is to take these race or 
gender based differences as facts, and then adjust government policy accordingly.   
 
 
Choice of Base Years 
While the base year for an analysis typically does not make much difference, that is not 
true in this case. While the projections in the 2004 trustees' report are only slightly more 
optimistic than in the 2001 report used in this analysis, the combination of slightly higher 
real wage growth (1.1 percent annual growth in the 2004 report, compared to 1.0 percent 
in the 2001 report) and three additional years until the trust fund is projected to be 
depleted, leads to an average increase in income projected in 2042 of 7.3 percent 
compared with the projection for 2039 in the 2001 report. This increase in projected 
income would lower both the baseline poverty rate and the number of people who are 
projected to be pushed into poverty by the projected cut in benefits.  
                                                 
3 These data appear in table 1 of the study.  
4 This numbers are taken from Census Bureau’s, Historical Income Tables, Table P-4 and P-5. 2001 is the 
most recent available on the website. 
  3 
In this respect, it is worth noting that the analysis by the Congressional Budget Office 
(CBO) assumes 1.3 percent real wage growth and that the trust fund will not be depleted 
until 2052.
5 Average wages and income under these assumptions will be 32.3 percent 
higher in 2052 than the projections used in this study. In the CBO analysis, poverty 
among this age group will have been virtually eliminated at the time the trust fund is 
projected to be depleted. It would still be extremely low (well under 2.0 percent) even if 
benefits were cut in the manner described in this study.
6 
 
Policy Response to a Shortfall In the Trust Fund 
 
This analysis effectively assumes that Congress never takes action, even as Social 
Security becomes unable to pay full scheduled benefits. While this is theoretically 
possible, it seems virtually inconceivable as a political outcome. The program did run out 
of money at the end of 1982 and had to borrow funds from the other trust funds to make 
current benefit payments. Congress and the President quickly moved the issue to the top 
of their priorities, and came out with the Greenspan Commission reforms, which are 
projected to have extended the life of the program by 59 years according to the trustees 
and by 69 years according CBO’s analysis. The share of seniors in the voting age 
population is projected to rise to 27.2 percent in 2040 from just 16.3 percent in 1980.
7 
 
While no one can foresee the political environment of 2042 (or the intervening 37 years, 
if nothing is ever done even as the trust fund balance heads towards zero), it seems 
unlikely that Congress would either take no action whatsoever, or alternatively would 
resolve the full shortfall on the benefit side. Furthermore, it is even less believable that if 
Congress did decide that the shortfall should be fully met on the benefit side, no steps 
would be taken to protect the least advantaged among the elderly.  
 
The Size of the Projected Poverty Gap 
 
The decision modeled in the Biggs paper is especially striking given the small size of the 
projected poverty gap. The paper projects that an additional 856,000 people will fall 
below the poverty line as a result of Social Security being unable to pay full benefits in 
2039. For the reasons noted above, this is likely a substantial overstatement, especially if 
the CBO projections for the solvency of the program prove to be more accurate. 
 
However, even accepting the projections in this paper as accurate, the size of the poverty 
gap created by the projected cut in benefits would still be relatively small. The amount by 
which the newly impoverished elderly fell below the poverty line would average just over 
                                                 
5 Congressional Budget Office, 2004. The Outlook for Social Security. 
[http://www.cbo.gov/showdoc.cfm?index=5530&sequence=0] 
6 This can be seen from the fact that the payable benefit projected by CBO for 2052 (83 percent of the 
scheduled benefit) is 5.9 percent higher than the base benefit used in this analysis for 2039, when the 
poverty rate for people aged 64 to 78 was projected at 2.0 percent.   
7 Social Security Trustees Report 2004, Table V. A2.  
  4$1050 annually in this scenario.
8 This creates a cumulative poverty gap of $935 million 
for this group as a result of the projected Social Security cuts.   
 
By comparison, CBO projects that GDP will be equal to $26,637.2 billion (in 2004 
dollars) in 2039, meaning that the projected poverty gap for this group will be equal to 
0.0035 percent of GDP in 2039. This projected poverty gap is also small relative to the 
size of President Bush’s tax cuts, which are equal to 2.0 percent of GDP. This projected 
poverty gap would be equal to just 0.18 percent of the size of President Bush’s tax cuts.  
 
Even the share of the tax cut going to the richest one percent of taxpayers would dwarf 
the projected poverty gap in this study – coming to approximately $210.0 billion in 2039. 
In other words, the projected poverty gap in the Biggs paper is approximately equal to the 
cost of President’s tax cuts over a 16 hour period. It is approximately equal to the cost of 
the tax cut for the richest one percent of families over a 2 day period. Of course, the size 
of the projected shortfall would be even smaller, if more realistic assumptions about the 
decline in the gender and racial income gaps were used, or if the projections in more 
recent Social Security trustees' reports or the CBO projections were used for the analysis. 
For example, if the CBO projections were used, the poverty gap created among the 
elderly in 2052 would be less than 5 hours of the cost of the Bush tax cut, and about 13 
hours of the cost of the tax cut for the richest one percent.   
 
The chart below shows the relative size of the Bush tax cuts, the share of the tax cuts 
going to the richest one percent of families and the elderly poverty gap that this paper 
projects will result in 2039. (There is a bar for the Social Security Poverty Gap – it is just 
too small to be visible next to the other bars.) In short, if an increase in poverty rates for 
the elderly proved to be a result of a Social Security shortfall that is never addressed, then 
it will clearly be a statement of the public’s priorities at the time, not an inability to 
address the problem of poverty among the elderly.   
                                                 
8 This estimate is obtained by calculating a weighted average for the elderly poverty line of $8,143 per 
person, assuming that 70 percent of the elderly poor live alone, in which case the poverty line is $9,143 in 
2004 dollars, and 30 percent live in couples, in which case the poverty line for 2 is $11,122. The average 
amount by which it is assumed that people fall below this line is 13.5 percent – half of the projected cut in 
Social Security benefits. Those pushed the most below the poverty line as result of this Social Security cut 
will be those right at the poverty line, who will see a 27 percent cut in benefits and therefore will be pushed 
27 percent below the poverty line. On the other hand, some people in this group will be pushed just 
marginally below the poverty line by the cut in benefits. Assuming an even distribution of people over this 
income category, the average extent to which this group falls below the poverty line will be 13.5 percent of 
the poverty line, or $1,057 in 2004 dollars.  
  5The Social Security Poverty Gap (2039)
in Perspective
0
100
200
300
400
500
600
Bush Tax Cut Richest One Percent Share
of Tax Cut
Poverty Gap (bar is too
small to be visible)
2
0
0
4
 
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l
a
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s
 
(
b
i
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l
i
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s
)
 
Source: CBO and author’s calculations. 
 
 
Comparing the Cuts in the Baseline with the Cuts in Plan 2 
 
One final point worth noting in considering the implications of this analysis is the size of 
the cuts projected in the baseline scenario with the size of the cuts projected in alternative 
proposals, specifically Plan 2 produced by the President’s Social Security Commission. 
This plan calls for indexing the Social Security benefit formula to prices rather than 
wages. Therefore it will lead to progressively larger cuts through time compared with the 
currently scheduled benefit.  
 
By 2042, this formula would lead to benefit cut of approximately 26 percent for an 
average wage earner, almost exactly the same as the cuts modeled in the Biggs paper. 
The size of the benefit cut under Plan 2 would rise to approximately 32 percent by the 
2052 date of trust fund depletion projected by CBO. This cut is far larger than the 18 
percent cut that CBO projects would be needed to keep the program balanced assuming 
no other changes are made. 
 
Of course, Plan 2 does include some increases in benefits for low income workers which 
will help protect them from these cuts. However, these increases are relatively low cost – 
Congress could put them into effect at any time between now and the trust fund’s 
depletion (if it occurs) without having to make any substantial cuts in other spending 
and/or tax increases. In other words, addressing the needs of the poorest among the 
elderly would be an extremely simple matter if Congress were to devote its attention to 
  6  7
the topic. It has very little to do with the basic structure of the Social Security program, 
which is intended to provide a core retirement income for the whole workforce.     
 
In short, the usefulness of this analysis from the Social Security Administration seems 
rather questionable. Several dubious assumptions, most importantly the disappearance of 
any reduction in gender-or race-based income gaps between 2022 and 2038, appear to 
play an important role in its finding that cuts in Social Security benefits will double 
poverty rates among the aged. More importantly, if the benefit cuts and resulting increase 
in poverty were to actually occur as projected in the Biggs study, the amount of money 
needed to correct the problem would be a trivial share of the total Federal government 
budget. If the political will existed to reverse the rise in poverty it could be accomplished 
with spending equal to less than 0.02 percent of the projected budget for 2039. Congress 
routinely makes such appropriations in a matter of days; it does not need to prepare for 
such contingencies thirty or forty years in advance.  

Growing the Social Security Crisis: The Social Security Administration's Poverty Rate Projections

http://www.cepr.net/documents/publications/social_security_2005_01_18.pdf

Growing the Social Security Crisis: The Social Security Administration's Poverty Rate Projections

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