The Social Security Solvency Dilemma – Part 1
The most recent edition of the Social Security Trustees Report moved the projected date for full depletion of the program’s trust fund reserves forward a year. While that’s not good news, certainly, it does have the effect of shining a brighter spotlight on the need for legislative action to address the potential catastrophe for America’s seniors. For those just beginning to focus on the problem, we’ll be providing over the next few days a synopsis of the solvency problem… its causes, the trust fund trajectory, and one set of steps to be considered to resolve the problem.
Social Security: The Cause of the problem
The Social Security Trustees and the Congressional Budget Office both project that the Social Security program reserves, now steadily being consumed, will be fully depleted by the early- to mid-2030s. The reality of this situation sets program beneficiaries up for severe consequences in little more than a decade. This is not the first time insolvency has surfaced in the program’s history, with remedial action taken in the early 1980s (the Social Security Amendments of 1983) buying roughly 50 years of scheduled benefit payments.
How Did We Get to This Point?
First, life expectancy for those reaching age 65 in 2019 has increased substantially since 1940, jumping by 52% for males and 54% for females. This aging of America’s population is a major factor in the long-term Social Security solvency dilemma, intensified over the past decade by the “baby boomers” and their exit from the workforce into retirement. The population cohort is large—76 million—and will result in roughly a doubling of America’s over-age-65 population by 2031, when the last members of this generational segment reach retirement age. And, statistically, an estimated three-quarters of these retiring “boomers” will begin drawing benefits at the earliest eligible age…62[i], with many of them removing themselves from the taxpaying workforce. This is anticipated to create additional pressure on Social Security’s cash flow.
Conversely, the taxpayer-to-beneficiary ratio has dropped even more dramatically, skidding from 42:1[ii] in 1945 to less than 3:1 today, with projections calling for a continued decline in the years ahead. In fact, the CDC reports that the 2020 U.S. birthrate fell by 4% from 2019[iii], marking the sixth consecutive year of declining births and presaging the expected taxpayer-to-beneficiary ratio decline. The effect of this, of course, is that the payment of Social Security benefits rests on fewer and fewer taxpayers, resulting in the program’s current and continuing deficit situation.
In addition to the above two drivers, financial factors like historically low interest rate returns on the trust fund reserves have progressively diminished the funds’ incoming cash flow, while social factors like declining workforce participation rates[iv] have blunted previously anticipated growth in Social Security tax revenue.
Another factor to be considered in this dilemma is the relationship of inflation to Social Security’s predicament. A combination of extraordinarily high, CPI-driven cost-of-living adjustments has the effect of increasing the expense side of the ledger, while the factors referenced above tend to decrease the revenue side.
Tomorrow’s post here will focus on the trust funds and how insolvency is projected to occur.