Social Security, a cornerstone of the American social safety net, is a topic of frequent discussion and, at times, concern. Terms like solvency, sustainability, and budget impacts are often used, yet their meanings are not always clear to the public. Currently, projections from the Social Security Board of Trustees indicate a growing challenge: by 2035, the program’s costs are expected to rise to a point where incoming taxes will only cover approximately 75 percent of scheduled benefits. This raises a critical question for millions of Americans: Why Is Social Security Running Out?
This impending shortfall isn’t due to increased lifespans, as is commonly misconstrued. Instead, the primary driver is a demographic shift – a decrease in birth rates from an average of three children per woman to around two. Crucially, this imbalance is projected to stabilize after 2035. This means that adjustments to either taxes or benefits, designed to counteract the effects of lower birth rates, could effectively restore Social Security’s financial health for the foreseeable future. Furthermore, it’s important to understand that as Treasury bonds held by Social Security trust funds are redeemed in the future, they are simply replaced by public debt. If, however, the trust fund assets are depleted without any reform measures, benefits would inevitably be reduced, but this action alone would not impact the overall federal budget deficit.
This article aims to clarify the financial status of Social Security. We will delve into the concepts of solvency and sustainability, analyze the relationship between Social Security and the broader federal budget, and ultimately address the core question: why is social security running out of money and what it means for the future of the program.
The Annual Social Security Trustees’ Reports: An Early Warning System
Since 1941, the Social Security Board of Trustees has been mandated to deliver an annual report to Congress detailing the program’s financial condition. This board is composed of six members: the Secretary of the Treasury (Managing Trustee), the Secretaries of Labor and Health and Human Services, the Commissioner of Social Security, and two public trustees appointed by the President and confirmed by the Senate.
These annual reports are crucial as they provide a comprehensive overview, including:
- Recent Financial Operations: An account of the trust funds’ financial activities in the past year.
- Short-Term Projections: Expected financial operations for the upcoming 5 years.
- Actuarial Status Analysis: A long-term analysis of the program’s financial health.
While recent and near-term projections offer a snapshot of the program’s immediate health, the actuarial status analysis serves as an essential early warning system, highlighting potential long-term financial challenges.
This long-term perspective provided by the Trustees’ reports is designed to give Congress ample time to consider and implement necessary adjustments thoughtfully. Although legislative action might sometimes appear to be taken close to a perceived crisis point, the consistent early warnings provided by these reports have historically fostered comprehensive discussions about potential solutions. This advance notice ensures that any eventual modifications to the law are based on thorough analysis and a broad consideration of different approaches and their potential impacts.
Since the significant Social Security Amendments of 1983, each annual report has reflected the evolving economic landscape and program experience, consistently pointing towards the need for ongoing adjustments to address future challenges. The 1983 Trustees Report initially declared Social Security to be in “actuarial balance” over a 75-year projection, estimating sufficient funding for full benefit payments until 2057 under their intermediate assumptions.
However, that same report also cautioned that well before 2057, program costs would exceed annual tax revenue, necessitating the use of trust fund reserves to maintain full benefits. It projected that these reserves would approach depletion by 2057, making it impossible to pay full scheduled benefits without further program modifications. Therefore, even with the 1983 Amendments, the need for future changes was already recognized. Subsequent annual reports have reinforced this projection, leading to extensive consideration of reform options over the years.
Understanding Social Security Solvency
A common question on the minds of individuals is, “Will Social Security be there for me?”. This question directly relates to the “solvency” of the Social Security trust funds. Solvency, in this context, refers to the trust funds’ ability at any given time to pay the full benefits mandated by law, promptly and reliably.
Social Security operates through two primary trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. Along with Medicare’s Hospital Insurance (HI) Trust Fund, these funds operate uniquely. Benefits can only be paid if the trust funds have sufficient assets. Unlike most other federal government operations, these programs cannot borrow to cover benefit payments if dedicated taxes and trust fund reserves fall short.
Therefore, the existence of assets within these trust funds is the crucial indicator of solvency. Chart 1, originally from the 2009 Trustees Report, illustrates this concept. Using the Trustees’ intermediate assumptions (Alternative II), the combined assets of the OASI and DI Trust Funds are projected to reach a peak of over 350 percent of annual program costs. However, this is followed by a decline, with projected exhaustion by 2037. The more optimistic, low-cost scenario (Alternative I) suggests solvency throughout the 75-year projection, while the pessimistic, high-cost scenario (Alternative III) anticipates trust fund exhaustion even sooner than 2037. These alternative scenarios underscore the inherent uncertainties in long-range projections.
Chart 1. Combined OASI and DI Trust Fund assets as a percentage of program cost, 1990–2008, projected under alternative assumptions, 2009–2085
Exhaustion of trust fund assets, as projected under intermediate assumptions, occurs because program costs are expected to exceed dedicated tax revenues in the future. This necessitates increasing net redemptions from the trust funds. The 2009 Trustees Report projected “cash flow” shortfalls for the combined Old-Age, Survivors, and Disability Insurance (OASDI) program starting in 2016. This means that tax revenue alone was projected to become insufficient to cover the annual cost of the program from that point forward. Chart 2, also from the 2009 Trustees Report, visually represents this relationship between dedicated tax income for OASDI and the projected cost of scheduled benefits.
Chart 2. OASDI program cost and noninterest income as percentages of taxable payroll, 2005–2008, projected under the intermediate assumptions, 2009–2085
The substantial accumulated assets in the combined OASI and DI Trust Funds, exceeding $2.5 trillion, will bridge the gap between program costs and current tax income in the coming years through net asset redemptions. However, the critical point is when these reserves are depleted. Upon projected trust fund exhaustion in 2037, continuing tax revenue is expected to cover only about 76 percent of currently scheduled benefits. This potential dramatic reduction in payable benefits, absent legislative action before 2037, is the most significant warning highlighted in the 2009 Trustees Report.
Historically, the OASI and DI Trust Funds have faced periods where tax revenue was insufficient to cover benefit costs and even approached asset exhaustion. From 1973 to 1983, the combined funds operated with a negative cash flow, depleting reserves (Chart 3). The Social Security Amendments of 1977 and 1983 implemented substantial program changes that reversed this negative cash flow, leading to the significant asset accumulation seen today. The 1977 amendments included a fundamental shift in benefit indexation, while the 1983 amendments raised the normal retirement age from 65 to 67 and introduced income taxation of Social Security benefits, with revenues directed back to the trust funds.
Chart 3. OASDI net cash flows as a percentage of gross domestic product (GDP), 1957–2009
However, a negative cash flow, where tax revenue is less than benefit costs, does not automatically signal imminent trust fund exhaustion. In a pay-as-you-go (PAYGO) financing model, where trust fund assets are maintained as a contingency reserve (e.g., one year’s program cost), a program might consistently operate with a negative cash flow. This scenario arises when the interest earned on trust fund assets exceeds the rate of program cost growth. In such cases, interest income can supplement tax revenue to meet current costs. The Trustees’ current intermediate assumptions project a long-term average real interest rate of 2.9 percent and a real OASDI program cost growth rate (above inflation) of about 1.6 percent from 2030 to 2080. Therefore, if program adjustments maintain a consistent level of trust fund assets, interest income could generally augment tax revenue for benefit payments.
A cash flow shortfall becomes problematic when it is substantial and persistent enough to deplete trust fund reserves towards exhaustion. This was the situation that prompted the major reforms of 1977 and 1983, as trust fund assets were nearing depletion. In fact, by the time of the 1983 amendments, the OASI Trust Fund was on the verge of being unable to fully meet benefit obligations. Emergency legislation was enacted to allow temporary borrowing from the DI and HI Trust Funds to ensure uninterrupted benefit payments while Congress formulated and passed the 1983 amendments.
The 1983 Amendments emphasized the importance of proactive planning. The annual long-range projections from the Trustees provide significant advance warning, allowing for a more manageable approach to addressing financing shortfalls compared to many other nations. This early warning system is considered crucial by policymakers for understanding the actuarial status and developing appropriate solutions that meet the needs of the American public.
This advance warning allows for legislative changes to be enacted well in advance of when they need to take full effect. This approach provides those affected by the changes with ample time to adjust their financial planning. It also facilitates gradual implementation, avoiding abrupt shifts in benefit or tax levels for future generations. A prime example is the increase in the normal retirement age (NRA) from 65 to 67, enacted in the 1983 Amendments. This change was phased in gradually, starting in 2000 for individuals reaching age 62, and will not be fully implemented until 2022, almost four decades after its enactment.
Separate Status of OASI and DI Trust Funds
While Social Security’s financial status is often discussed in aggregate, it’s important to recognize the existence of two distinct trust funds: OASI and DI. Old-age benefits were established in 1935, with monthly payments starting in 1940. Disability benefits for workers below retirement age were introduced later, in 1956. A separate DI Trust Fund was created at that time, partly to acknowledge the unique nature of disability and to maintain a distinct focus on its financing.
Currently, the DI program faces a less favorable actuarial outlook than the OASI program. The 2009 Trustees Report projected DI Trust Fund exhaustion by 2020 under intermediate assumptions, significantly sooner than the OASI fund’s projected exhaustion in 2038. The more immediate concern for the DI fund necessitates particular attention. Since 1983, DI program costs have risen more sharply than anticipated, exceeding projections to a greater extent than OASI costs. This is not entirely unexpected, as OASI benefit projections are generally more predictable than those for DI, which are influenced by various economic and social factors affecting disability claims.
Chart 4, from the 2009 Trustees Report, illustrates the differing projections for the OASI and DI Trust Funds, highlighting the earlier projected exhaustion for DI and the greater uncertainty surrounding DI costs and actuarial status compared to OASI.
Chart 4. OASI and DI Trust Fund assets as a percentage of program costs, 1990–2008, projected under alternative assumptions, 2009–2085
In 1994, Congress addressed a similar near-term DI shortfall by reallocating a portion of the combined OASDI payroll tax rate from OASI to DI, recognizing OASI’s stronger financial position. Given the possibility that comprehensive OASDI reform might not be enacted by 2020 (and indeed, it wasn’t), a similar tax rate reallocation of a small percentage (0.1 percent to 0.2 percent) from the existing 12.4 percent rate to the DI fund could again be considered to better balance the financial status of the two trust funds. This, coupled with the simplicity of analyzing OASDI as a unified program, explains why most actuarial analyses are conducted on a combined basis.
The Question of Social Security Sustainability
The concept of Social Security sustainability has evolved to encompass two distinct interpretations. The first, simpler view focuses on whether current dedicated tax revenues are sufficient to finance currently legislated benefits without any legal modifications. The second, broader perspective considers whether the fundamental structure of the program – defined benefits linked to career average earnings and a flat payroll tax up to a certain earnings cap – remains viable for the future.
The first concept, financial sustainability under current law, is relatively straightforward to assess. As the Trustees’ intermediate projections indicate, future modifications to benefits or revenue streams will almost certainly be necessary to avert trust fund exhaustion. In the near term, the specific needs of the DI Trust Fund require attention by 2020. More broadly, the projected shortfall for the entire OASDI program must be addressed by 2037. The 2009 Trustees Report estimated that the 75-year shortfall under intermediate assumptions could be resolved through benefit reductions equivalent to a 13 percent immediate cut across all benefits, a revenue increase equivalent to raising the combined payroll tax rate from 12.4 percent to 14.4 percent, or a combination of both.
The second, more complex concept of sustainability concerns the fundamental structure of OASDI benefits and financing. This is not directly addressed in the Trustees’ reports but is inherently political, reflecting the evolving preferences of the American public as expressed through their elected representatives. While modifications within the existing program structure can restore financial soundness, the broader question of whether the current system, characterized by monthly benefits and PAYGO financing, is the most desirable and sustainable model for future generations is open to debate and potential evolution through future Congressional action.
However, the Trustees’ reports do offer insights into the sustainability of current benefit levels by comparing program costs and scheduled tax revenues as percentages of the nation’s total economic output, the Gross Domestic Product (GDP).
Projected OASDI costs are expected to rise from approximately 4.5 percent of GDP (the level since 1990) to about 6 percent of GDP over the next two decades, and then stabilize at roughly that level (Chart 5). While an increase from 4.5 percent to 6 percent of GDP is significant, the fact that this cost is projected to level off is a crucial point. Chart 5 focuses on the fundamental choice facing policymakers: whether to maintain currently scheduled benefit levels for future generations, which would necessitate higher taxes, or to reduce scheduled benefits to levels that are sustainable with current tax rates.
Chart 5. OASDI program cost and noninterest income as percentages of GDP, 1990–2008, projected under the intermediate assumptions, 2009–2085
The Federal Accounting Standards Advisory Board has recently established new reporting standards for federal program sustainability within the Consolidated Financial Report of the United States Government. These standards require assessing the OASDI program’s cost and income relative to GDP, enabling comparison and aggregation with other federal programs for a comprehensive fiscal overview.
Diverse Financial Measures of Social Security
The financial health of the OASDI program can be evaluated through various metrics. As previously discussed, the most fundamental consideration is solvency – the ability to pay scheduled benefits on time, indicated by positive trust fund reserves. The projected trust fund exhaustion for OASDI in 2037 signifies a point where significant changes must occur to avoid a sharp reduction in payable benefits. Congress is expected to act before this point to avert such consequences. A second crucial aspect is sustainability, both financially and politically, which can be assessed by considering the program’s share of GDP.
Historically, a single summary measure, the actuarial balance, has been used to represent the OASDI program’s financial status. This metric quantifies the difference between available resources under current law and the cost of scheduled benefits over a 75-year period. The 2009 Trustees Report indicated a negative actuarial balance under intermediate assumptions, representing a shortfall of 2.00 percent of taxable payroll over the 75-year period. While convenient for its simplicity, the actuarial balance has limitations when used in isolation. It doesn’t capture the timing or trend of annual shortfalls and primarily indicates the trust fund level at the end of the 75-year projection. A zero actuarial balance implies that trust fund assets at the end of the period are projected to equal the program’s annual cost at that time, but it provides no insight into solvency throughout the period or the trajectory of trust fund assets.
The 1983 amendments, enacted with a projected trust fund level declining rapidly towards exhaustion at the end of the projection period, might reflect an overreliance on the single actuarial balance measure. Since then, numerous additional measures have been developed and widely adopted. “Sustainable solvency” has emerged as a key metric.
Sustainable solvency requires both maintaining positive trust fund balances throughout the 75-year projection and ensuring that trust fund reserves at the end of the period are stable or increasing as a percentage of annual program costs. Meeting these conditions suggests that program financing is adequate for the foreseeable future under the given assumptions. This concept was well-established by the 1994-1996 Social Security Advisory Council and guided their development of reform proposals. Since then, sustainable solvency has been a benchmark for virtually all comprehensive reform proposals, providing greater assurance against future deficits shortly after reform implementation. Numerous proposals have been developed by policymakers over the past 15 years and evaluated by the Office of the Chief Actuary.
Another measure gaining prominence is the annual balance between tax income and program cost in the 75th year of the projection. While the overall 75-year shortfall is 2.00 percent of taxable payroll, annual shortfalls increase in later years, exceeding 4 percent of payroll by 2083. Therefore, assessing reform provisions requires considering both their impact on the overall 75-year actuarial balance and their specific effect on the annual balance in the 75th year. Both measures are provided for individual provisions evaluated by the Office of the Chief Actuary.
More recently, attention has shifted to summary measures like the 75-year and infinite horizon open group unfunded obligations. An open group unfunded obligation represents the total revenue shortfall to cover scheduled benefits over a given period. The 75-year unfunded obligation for OASDI was estimated at $5.3 trillion in present value in the 2009 Trustees Report. This value can be misinterpreted if taken out of context. It represents the cumulative shortfall from 2037 (after projected trust fund exhaustion) through 2083, not a current, immediate need. These shortfalls will require either increased taxes or benefit reductions during those years. To provide context, the Trustees express this 75-year unfunded obligation as percentages of OASDI taxable payroll (1.9 percent) and GDP (0.7 percent) over the period, offering a clearer understanding of the required adjustments.
Over an infinite horizon, the 2009 Trustees Report estimated the present value shortfall for OASDI at approximately $15.1 trillion, or 3.4 percent of taxable payroll and 1.2 percent of GDP over the infinite future. However, these long-term projections are subject to significant uncertainty.
The 2009 Trustees Report also includes an estimate of the closed group unfunded obligation. This is a highly theoretical measure, truly meaningful only for “fully advance funded” programs. A fully advance funded program would hold sufficient assets to pay all benefits earned to date without requiring future contributions from current or future workers. For such programs, the closed group unfunded obligation should be near zero. However, for a PAYGO system like Social Security, a large closed group unfunded obligation is expected. In the 2009 Report, the OASDI closed group unfunded obligation was reported as $16.3 trillion, or 3.7 percent of taxable payroll and 1.2 percent of GDP over the infinite future.
The Inherent Uncertainty of Future Projections
Projections of OASDI costs and income are inherently uncertain, with uncertainty increasing further into the future. The Trustees address this uncertainty in their annual reports through several methods. The use of low-cost and high-cost alternatives alongside intermediate assumptions provides scenarios reflecting plausible ranges of variation in key parameters. Each parameter in these alternatives is adjusted by a reasonable amount from the intermediate estimate, although it’s unlikely that all parameters would deviate in the same direction simultaneously. These three scenarios create a range of potential program outcomes.
Chart 6 shows the projected range of cost rates for OASI and DI under these three alternative scenarios from the 2009 Trustees Report. Trust fund levels under these scenarios were presented earlier. Income rates are shown only for the intermediate scenario (Alternative II), as they exhibit minimal variation across the three alternatives.
Chart 6. OASI and DI program cost and noninterest income as percentages of taxable payroll, 1990–2008, projected under alternative assumptions, 2009–2085
The Trustees’ reports also include sensitivity analyses, assessing the impact of individual parameter variations. These analyses provide insight into how sensitive the program’s long-term financial status is to changes in specific assumptions compared to the intermediate projections.
Finally, the reports present stochastic projections, simulating thousands of possible future financial operations for OASDI. In these projections, numerous economic, demographic, and disability-related parameters are allowed to vary randomly over time, generating 5,000 distinct projection scenarios. The random variation reflects historical parameter fluctuations and aims to simulate a wide range of potential future outcomes. The results, presented for future program costs and trust fund levels, show the distribution of outcomes from these 5,000 scenarios year-by-year. Chart 7 displays the distribution derived from the stochastic projections in the 2009 Trustees Report. These stochastic results are valuable as they estimate the probability of actual outcomes falling within or outside specific probability intervals (e.g., the 95 percent probability interval is between the 2.5th and 97.5th percentile lines). It’s important to note that the lines on this chart don’t represent specific individual simulations, but rather, for each line and year, they show the value from the simulation at that percentile in that particular year. The specific simulation at a given percentile will vary from year to year.
Chart 7. Stochastic projection of OASDI trust fund assets as a percentage of program cost, 2009–2084
The stochastic projections from the 2009 Trustees Report suggest a high probability of OASDI trust fund exhaustion well before 2083. However, it’s important to note that stochastic projection methodologies are still evolving, and further refinements are likely to broaden the range of uncertainty surrounding the projected trust fund exhaustion date across probability intervals.
Actuarial Status and Budgetary Considerations
The legal requirements for the Social Security Board of Trustees’ annual report specify the desired analysis. While OASDI solvency heavily relies on trust fund assets invested in Treasury securities, the actuarial assessment is separate from direct consideration of federal budget implications.
Trust fund assets are legally required to be invested in interest-bearing securities guaranteed by the U.S. government. Currently, all assets are in nonmarketable, special-issue Treasury obligations. When assessing federal government-wide assets and liabilities, trust fund assets are generally considered a wash – an asset for the trust funds but an equal liability for the Treasury’s General Fund. While this is a valid accounting perspective, it doesn’t diminish the claim that trust fund assets represent for future cash needs. Trust fund securities have always been redeemed upon maturity or when needed, with no default risk. Financial markets likely understand that future redemption of these securities may require the Treasury to raise taxes, reduce other spending, or increase public borrowing. In fact, trust fund assets are included with publicly held debt to calculate the total debt subject to the Congressional debt limit. Redemptions leading to increased publicly held debt would not change the total federal debt (Chart 8).
Chart 8. OASDI net cash flows as a percentage of GDP, 1957–2009, projected under the intermediate assumptions, 2010–2085
Another crucial distinction between trust fund and budget accounting is the assumption about current law. Trustees’ reports differentiate between program costs (scheduled benefits) and actual expenditures (benefits payable given trust fund limitations). If trust funds are exhausted, expenditures are limited to ongoing tax income. The 2009 Trustees Report projected that only 76 percent of scheduled benefits could be paid upon trust fund exhaustion in 2037. This limitation acts as a spending constraint and compels Congressional action before fund depletion.
Budget scoring conventions, conversely, assume full scheduled benefits continue to be paid even after fund exhaustion, regardless of insufficient tax income. Budgetary projections for OASI, DI, and HI programs presume legal changes allowing trust funds to borrow from or receive transfers from the Treasury’s General Fund to ensure full benefit payments.
The Root Cause of the Financial Shortfall
The OASDI program, funded by a 12.4 percent payroll tax and income tax revenue from benefits, has generated more tax revenue than benefit expenditures for over two decades. However, this favorable cash flow is shifting due to the aging of the large baby boom generation (born 1946-1965). As this generation enters retirement, program costs are rising. The oldest baby boomers have already reached early retirement age (62), and this demographic shift will continue for the next 20 years. The significant cost increase projected for OASDI between 2010 and 2030, both as a percentage of taxable payroll and GDP, is fundamentally driven by a change in the ratio of beneficiaries to workers.
Chart 9, illustrating the number of beneficiaries per 100 OASDI-covered workers, closely mirrors Chart 6, which showed projected annual program cost rates. This correlation is expected, as benefits generally increase at a rate similar to average wages. Notably, the significant upward shift in both the beneficiary-to-worker ratio and cost rates is permanent; it doesn’t revert to lower levels after the baby boom generation passes away. This permanent shift is not caused by the baby boom itself, but by the substantial and seemingly permanent decline in birth rates following the baby boom.
Chart 9. Number of OASDI beneficiaries per 100 covered workers, 1980–2008, projected under alternative assumptions, 2009–2085
Birth rates, averaging over three children per woman during the baby boom (1946-1965), dropped to about two children per woman by 1970 and have remained around that level since (Chart 10). Examining longer historical trends highlights the significance of this birth rate decline (Table 1). Birth rates were much higher in 1875 (over four children per woman) and had already declined significantly by 1925 (to three children per woman). Reductions in infant and childhood mortality rates partly explain this long-term decline. Before 1900, the probability of a newborn surviving to age 5 or 10 was considerably lower. Therefore, achieving a desired family size required more births. Adjusting birth rates to only include children surviving to age 10 reveals relatively stable total fertility rates around three children per woman from 1875 to 1925. From 1926 to 1965, this adjusted rate averaged about 2.7 births per woman, encompassing both periods of low birth rates (Great Depression, WWII) and high birth rates (post-WWII). However, after 1965, the total fertility rate shifted to a new, lower level around two children per woman. This sustained shift to lower birth rates is the primary driver of the changing age distribution between 2010 and 2030 and the resulting shift in the beneficiary-to-worker ratio, ultimately explaining why is social security running out of money.
Chart 10. Total U.S. fertility rates with and without adjustment for survival to age 10, 1875–2005
Table 1. Annual average total U.S. fertility rates with and without adjustment for survival to age 10, various periods, 1875–2003
| Period | Average TFR | Adjusted TFR |
|---|---|---|
| 1875–1925 | 3.67 | 2.85 |
| 1926–1965 | 2.84 | 2.69 |
| 1966–1990 | 1.99 | 1.95 |
| 1991–2003 | 2.01 | 1.99 |
Chart 11 further demonstrates the impact of birth rate changes on population age distribution. The aged dependency ratio (ratio of population 65+ to working-age population 20-64) has been relatively stable since 1975. It was suppressed between 1994 and 2010 as the smaller birth cohorts from the Great Depression and WWII reached age 65. However, this ratio is projected to rise significantly between 2010 and 2030 due to both the baby boom generation reaching 65 and the entry of smaller post-baby boom birth cohorts into the working ages. The dashed line in Chart 11 shows projected dependency ratios assuming no further life expectancy improvements after 2008. This illustrates that the upward shift through 2030 is primarily driven by changing birth rates. The total dependency ratio (ratio of population 65+ and under 20 to working-age population 20-64) exhibits a similar trend.
Chart 11. Total and aged dependency ratios, 1975–2008, projected under alternative life expectancy assumptions, 2009–2085
While changes in real wage growth, productivity, labor force participation, inflation, unemployment, and other economic factors impact Social Security’s future costs, most of these, especially real wage growth, affect both tax income and benefits, creating offsetting effects on the program as a whole. Furthermore, these parameters haven’t experienced shifts as dramatic as the change in birth rates.
Addressing the Future of Social Security
One way to understand the impact of the changing aged dependency ratio and beneficiary-to-worker ratio is to consider the workers-per-beneficiary metric. For the past 35 years, there have been approximately 3.3 workers per beneficiary. After 2030, this ratio is projected to decline to two workers per beneficiary.
With an average worker benefit around $1,000 per month, 3.3 workers need to contribute about $300 each monthly to fund that benefit. However, with only two workers per beneficiary, each worker would need to contribute $500 to maintain the same $1,000 benefit level.
Therefore, significant adjustments are needed to address the increasing costs of Social Security. The 2009 Trustees Report intermediate projections suggest that delaying action until trust fund exhaustion in 2037 would necessitate benefit reductions of around 25 percent or payroll tax increases of approximately one-third (a 4 percent increase on top of the current 12.4 percent rate). Past Social Security reforms suggest that future changes will likely involve a combination of benefit adjustments and tax increases.
Given that the primary driver of increased OASDI costs over the next 20 years is lower birth rates, and not increased longevity, it’s debatable whether solely raising the Normal Retirement Age (NRA) should be the primary solution. While further increases in the NRA beyond 67 could be considered, especially given potential improvements in future health and working lifespans, it raises concerns about benefit adequacy. Once the NRA reaches 67, individuals claiming benefits at age 62 already receive only 70 percent of the unreduced benefit. Further NRA increases would further reduce benefit adequacy at age 62 and at all other ages.
There is no single, easy answer to addressing the increased cost of supporting retirees with fewer workers, a consequence of lower birth rates. This challenge is not unique to Social Security; it affects Medicare and many private and public retirement systems globally. The decline in birth rates is even more pronounced in countries like Japan and many European nations, which are grappling with even more severe aging population challenges.
Policymakers have considered a range of potential changes to Social Security, and the Office of the Chief Actuary has evaluated their impacts. Exploring these options, both individually and as comprehensive reform proposals, is crucial for understanding potential paths to restoring Social Security’s long-term solvency and addressing why is social security running out of money.
