Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Social Security trust fund running on empty

We first covered the looming insolvency of Social Security in this space in 2012. The Trustees of Social Security and Medicare reported at that time that the combined Social Security trust fund was spending more than its income and projected that the funds would be depleted by 2033. Fast forward 11 years, and the 2023 report estimates that the trust fund will be depleted by (pause for effect): 2034. In other words, the forecast has proven remarkably accurate, and Congress has still done little to address the impending reckoning.

The sacrifices now necessary to restore the solvency of the system are greater today than if we had acted 11 years ago. The cost of sitting idle for another 11 years until the trust becomes insolvent will be much higher.

Social Security and Medicare are overseen by a Board of Trustees that is charged with reporting on the financial health of the two largest programs in the Federal Government. The permanent members include the Secretaries of the Treasury, Labor, and Health and Human Services as well as the Commissioner of Social Security. In addition, the board includes two public members, typically economists, appointed by the President and confirmed by the US Senate. As an indication of Congress’s lack of urgency, the Senate has not acted on either President Trump’s nor President Biden’s nominees, and these positions have remained vacant since 2015.

Social Security technically comprises two separate trust accounts: the massive Old Age & Survivors Insurance (OASI) fund which covers retirement income payments, and the much smaller Disability Insurance (DI) trust. Each of the trusts is funded primarily by payroll taxes, assessed equally on employers and employees, plus interest income earned from investing the funds in non-tradeable US Treasury bonds. The two funds are often combined to present an overall picture and referred to as OASDI. While the DI trust remains well funded, the bigger OASI trust that sends seniors their monthly Social Security checks is slated to go broke in 2033. The combined OASDI program is on a path to fully exhaust its assets by 2034, when today’s 56-year-olds reach full retirement age.

The combined Social Security trusts first began running primary deficits in 2010. That is the point at which expenditures exceeded payroll tax revenues, the difference being made up by interest income on the funds in the trust. However, 2021 marked the first year during which Social Security was forced to liquidate assets to cover payments, after which the surplus quickly depletes until the fund is tapped out in 2034, according to current projections.

What does that mean in practical terms? By law, once the trust fund is fully exhausted, all benefits must be reduced to a level supported by current income. According to the trustees, that means all recipients will see an immediate 20% reduction in payments starting in 2034, equating to a cut of $12,000 to $16,000 per couple in their annual Social Security checks.

Fortunately, the Social Security funding deficiency is a slow-moving and entirely predictable phenomenon, suggesting that timely nominal adjustments could alleviate substantial future pain. Good news for humans is bad news from an actuarial perspective, as life expectancies have expanded sharply since the creation of the safety network. An average male born in 1940 could expect to live to age 61 (and therefore never collect Social Security). A baby boy born this year will live to age 75 and potentially much longer given with medical advances ahead. Meanwhile, the pool of beneficiaries has expanded much faster than the workforce. In 1960, there were 5.1 workers supporting each retiree on Social Security. Today, there are only 2.8 workers per beneficiary falling to just 2.3 by 2035.

The last major rework of the Social Security program occurred in 1983 when Congress enacted a package of significant reforms proposed by a bipartisan commission chaired by Alan Greenspan. The process was politically difficult but demonstrated Congressional statesmanship and ensured solvency for the next two generations. A comparable display of public interest will be required to address the approaching insolvency this time.

The shortfall today is nearly double what it was in 2010 when the trustees first reported a primary deficit. restoring solvency for the next 75 years would have been relatively easy had we faced up to the challenge at that time. Now it’s going to be more painful. The report estimates that making the OASDI trust whole today would require either a 25% increase in tax rates or a 21% permanent reduction in benefits (or some combination thereof). But each year of inaction magnifies the problem, and delaying until the drop-dead date would require a 33% tax increase or 25% benefit cuts. At this point, the shortfall has grown so substantial that even fully eliminating benefits to any new retirees after 2034 would not fix the problem.

The inadequate funding status of the Social Security trust is not complicated, nor is it a recent development. Just as in 2012 (or in 1983), ensuring solvency will require some combination of increasing payroll taxes and raising the retirement age, phased in over a generation. Math is oddly immutable, and the cost of delay will continue to compound in tandem with the growing deficit until legislators forego demagoguery and seek compromise on the difficult but essential tradeoffs.

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