The trust funds are projected to be depleted by 2035 – and the clock is ticking
by Amy Kemp, MAAA, ASA, EA
Ms. Kemp is chairperson of the American Academy of Actuaries’ Social Security Committee, which brings to the public and the U.S. actuarial profession expertise regarding U.S. social insurance systems with a principal focus on Social Security. The committee provides independent and objective analysis, advice, and education to stakeholders of social insurance plans with respect to financing, annual reporting, managing system risks, and program design, through issue briefs, webinars, briefings, and other published work available at actuary.org. She is a member of the Academy’s Pension Practice Council, and is vice president, consulting, at BPAS Actuarial and Pension Services in Syracuse, N.Y.Social Security is being discussed by various candidates campaigning for political offices. Recent campaign trail statements and primary victory speeches have included comments regarding Social Security and the funding of the program. With the November elections nearing, it will be important for Americans to consider the facts and candidates’ positions on Social Security reform proposals when deciding how to cast their vote.
Social Security provides benefits to 65 million people. The solvency of the program will need to be addressed so that current and future retirees can continue to rely on these benefits. I am presenting a nonpartisan summary of Social Security solvency information and reform proposals, including relevant resources developed by the Social Security Committee of the American Academy of Actuaries, as well as the Social Security Administration’s Office of the Chief Actuary (OCACT).
Background
Social Security is made up of two programs:
- Old Age and Survivors Insurance, referred to as OASI, which provides retirement and survivor benefits, and
- Disability Insurance, referred to as DI, which provides disability benefits.
The two programs have separate trust funds, but historically, contributions have been reallocated between the OASI and DI funds to avoid depletion. The Social Security Trustees Report is a detailed annual assessment by the federal government of the solvency of the Social Security program. Information is available in the Trustees Report outlining the OASI and DI programs separately, but also on a hypothetically combined basis.
Social Security Funding
There are three sources of income to the Social Security program: payroll taxes collected from workers covered by Social Security, interest paid on the trust funds, and income taxes collected from higher-income Social Security beneficiaries receiving benefits. Workers contribute 6.2% of their earnings, up to a maximum earnings amount equal to the taxable maximum, and their employers contribute another 6.2%.
The taxable maximum is adjusted annually by the national average wage index. In 2021, the taxable maximum was $142,800, and in 2022, the taxable maximum is $147,000. The payroll tax contributions were 90.1% of total program income in 2021. Social Security’s trust funds are invested in special-issue bonds with the Department of the Treasury. Investment income is credited to the program from the returns on those bonds and was 6.4% of the total program income in 2021. Income taxation of benefits varies by a beneficiary’s annual income, and was 3.5% of the total program income in 2021.
The total income of the program in 2021 was $1,088.3 billion. Details are in Table 1.
Table 1: 2021 Income for Combined Social Security Trust Funds
Payroll Tax Contributions | $980.6 | B |
Interest on Investments | $70.1 | B |
Taxation of Benefits | $37.6 | B |
Total Income | $1,088.3 | B |
Source: The 2022 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds
Social Security Costs
The costs of the Social Security program include the benefits paid to beneficiaries and the expenses of the program. Benefits paid were 99.0% of the total cost of the program in 2021 while expenses were 1.0%. The total cost of the program in 2021 was $1,144.6 billion, with details in Table 2.
Table 2: 2021 Costs for the Combined Social Security Trust Funds
Benefits | $1,133.2 | B |
Expenses | $11.4 | B |
Total Cost | $1,144.6 | B |
Source: The 2022 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds
2021 Costs Exceed Income
As seen from subtracting the total cost shown in Table 2 from the total income shown in Table 1, Social Security paid out $56.3 billion more in benefits and expenses than it collected in income.
Because Social Security has trust funds, the total costs of 2021 were still met. However, the trust funds declined in 2021 by the $56.3 billion that costs exceeded income. At the end of 2020, the trust funds totaled $2,908.3 billion, and at the end of 2021, the trust funds totaled $2,852.0 billion.
Solvency
As highlighted in the Academy’s issue brief An Actuarial Perspective on the 2022 Social Security Trustees Report, the 2022 Trustees Report contains key solvency facts about the system:
- Social Security costs continue to be projected to exceed the income of the program, until the trust funds are projected to become depleted during 2035.
- If changes to the program are not implemented before 2035, 80% of scheduled benefits would be payable after depletion of the trust funds in 2035, declining to 74% by 2096.
So it is currently projected that Social Security will be able to pay scheduled benefits through 2034. However, once the trust funds are depleted, these funds are no longer available to partially pay for the costs of the program. Additionally, no further interest income would accrue on the trust funds. Income to the system would be based only on payroll taxes from workers and income taxes collected from Social Security beneficiaries receiving benefits.
The 2022 Trustees Report estimates that at the time the trust funds are depleted in 2035, the remaining income items will support 80% of the benefits that would otherwise be payable. A new infographic from the Academy on the 2022 Trustees Report illustrates these and other key facts about Social Security, including demographic trends contributing to the actuarial imbalance of the program, such as the declining ratio of workers per beneficiary and increases in the population aged 65 and older.
The Trustees Report also presents estimates of the increase in the payroll tax or the reduction in benefits that would bring solvency to the program over the 75-year projection period. Payroll taxes currently total 12.4% (6.2% collected from the employee and 6.2% collected from the employer, as mentioned). The 2022 Trustees Report indicates that if immediate and permanent changes are made as follows, the program would remain solvent over the next 75 years:
- Increase payroll taxes by 3.24 percentage points to 15.64%, or
- Reduce scheduled benefits by 20.3%, or
- Some combination of these approaches.
If reforms aimed at solvency are delayed, they will need to be significantly greater in scope, with less time to make adjustments. If changes are deferred until 2035 when the trust funds are projected to be depleted, immediate and permanent changes would need to be made at that time as follows, for the program to remain solvent over the 75-year period:
- Increase payroll taxes by 4.07 percentage points to 16.47%, or
- Reduce scheduled benefits by 24.9%, or
- Some combination of these approaches.
Sustainable Solvency
The Trustees Report includes a 75-year projection of income and costs to the program, and includes a discussion of not just solvency, but sustainable solvency, described as “Sustainable solvency for the financing of the program under a specified set of assumptions has been achieved when the projected trust fund ratio is positive throughout the 75-year projection period and is either stable or rising at the end of the period.” Sustainable solvency is a higher standard, such that solvency of the program continues past the 75th year in the projection. If changes to the program include a stable or rising level in the trust fund, future legislative adjustments could be avoided.
Proposed Changes
As members of Congress suggest reform proposals, typically with multiple provisions, OCACT performs an analysis of the proposed reforms to determine the impact on the finances of the Social Security program. The proposals are listed in date order, from the most recent response to historical responses dating back to 1983 and can be found here: “Estimates of Proposals to Change the Social Security Program or the SSI Program” (ssa.gov). Often, the proposals are complex and contain provisions that both increase and decrease solvency. OCACT reviews the proposed revisions separately and as a whole to determine the impact.
For a more granular sense of how changing individual provisions of Social Security would impact the system and its financial condition, it is useful to review the annual analysis of OCACT, “Estimates of Individual Changes Modifying Social Security” (ssa.gov). The categories analyzed include those that would address the program solvency, through either reducing benefits or increasing taxes. Many options are considered, but highlights of benefit reductions are: adjustments in the calculation of the initial benefit, changing the annual cost-of-living adjustment, and increasing the normal retirement age.
Highlights of taxation increases include: adjustments to the payroll tax, the maximum taxable earnings, and the inclusion of other sources of income. Further, various reform proposals have been discussed by legislators that would increase benefits, and would therefore worsen the solvency of the program. Some examples are: an increase in the minimum benefit, an increase in benefits for workers dropping out of the workforce for some years to care for family members, and an increase in benefits for beneficiaries over age 85. These proposed changes are also included in the financial impact analysis provided by OCACT.
Certain changes to individual provisions of Social Security would have greater impact on reducing the long-term financial shortfall of the system, as illustrated in Table 3 with sample proposals drawn from OCACT’s “Summary of Provisions That Would Change the Social Security Program” (ssa.gov).
The Social Security Committee of the American Academy of Actuaries provides further discussion in issue briefs on the different proposals to change benefits and to change taxation. Additionally, the Social Security Committee provides a discussion on raising the Social Security normal retirement age, including information on reform proposals and considerations for addressing variations in expected longevity by socioeconomic groups.
As the campaign season wraps up, valuable resources developed by OCACT and the American Academy of Actuaries are available for use in engaging in informed discussions with candidates and other voters about Social Security’s financial future. Every voter can consider the changes that they consider most effective—whether a reduction of benefits, an increase in taxes, or some combination of the two. The sooner reforms needed to achieve solvency over the long term can be enacted into law passed by Congress and signed by the president, the more time there is to make changes gradually and to allow workers and beneficiaries time to adjust to the changes.
Thanks for a clear and concise summary as well as the links to further information.