Social Security Trust Fund Might Not Last As Long As Projected

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The Social Security retirement trust fund will last one year longer than was estimated last year, according to the latest annual report from the Board of Trustees of Social Security. But the details of the report don’t inspire confidence in the estimate.

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During the first two years of the pandemic, it appeared that the Social Security trust fund would be likely to be exhausted faster than previously estimated. Unemployment rose dramatically, reducing payroll taxes coming into the system, and it seemed likely that many people begin claiming their benefits earlier than they would have before the pandemic.

While the pandemic recession in 2020 was worse than anything the trustees had anticipated in previous annual reports, the recession was very short. Also, the recovery was much stronger than anticipated in the 2021 annual report. On top of that, not as many people claimed benefits as anticipated, perhaps because Social Security Administration offices were closed for a long time.

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The retirement trust fund, officially known as the Old Age and Survivors Insurance trust fund, now is projected to run out of assets in 2034, one year later than was estimated last year.

When the trust fund is depleted, the Social Security retirement program won’t end. The trustees estimate that the annual tax revenue coming into the program will be enough to pay about 77% of benefits for at least 75 years.

The total annual cost of Social Security began to exceed its annual income in 2021 and will continue to do so through the 75-year period over which the estimates were made. Social Security’s costs began to exceed its non-interest income in 2010.

If Congress doesn’t act to shore up the program before 2034, there will have to be an across-the-board reduction in benefits of 23% in 2034.

The trustees say that to keep the trust fund fully solvent through the next 75 years, a combination of the following actions would have had to take effect by January 2022: (1) an immediate and permanent payroll tax rate increase of 3.24 percentage points to 15.64 %; and (2) an immediate and permanent reduction of benefits of 20.3% applied to all current and future beneficiaries, or a 24.1% cut if the reductions were applied only to those who become initially eligible for benefits in 2022 or later.

Each year reforms are delayed increases the required changes. For example, if changes don’t occur until 2035, payroll taxes would have to increase 4.07 percentage points to 16.47% or all benefits would have to decline by 24.9%. Or some combination of the two would have to occur.

Another alternative is for the work force to increase faster than projected so more people are paying taxes into the program.

But there are a lot of assumptions are behind the report’s conclusions, and some of those assumptions might be too optimistic.

Consider inflation. Social Security benefits are indexed for inflation. The higher inflation is, the higher the benefits the program has to pay.

The 2022 report from the trustees estimates that the cost of living adjustment (COLA) for 2023 will be only 3.8%. It was 5.9% for 2022, and as you know inflation in 2022 already is much higher than that. It’s not very realistic that the COLA for 2023 will be only 3.8%, unless one is forecasting a very steep decline in prices in the last half of 2022.

The chief actuary of Social Security already publicly contradicted the forecast, saying that the COLA for 2023 is likely to be around 8%.

The report also assumes the COLA will be 2.5% in 2024 and return to a long term rate of 2.4% after that. Those assumptions depend on a rapid end to the current inflation.

The trustees also continued an assumption that was new last year. The report assumes the birth rate in the US increases to 2.0 births per woman beginning last year.

More births means more workers in the future and more taxes flowing into the system. That would help the system’s solvency.

But the birth rate assumption contradicts both recent experience and forecasts from other sources.

The projections in the 2022 annual report from Social Security’s trustees seem optimistic. Congress is likely to have to work on reforms earlier than forecast to avoid across-the-board cuts to current beneficiaries.

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Credit: www.forbes.com /

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