Social Security insolvency’s inevitable

SOCIAL SECURITY FINANCES: PRESENT AND FUTURE Social Security is mostly a pay-as-you-go program — that is, current benefits are financed largely by current payroll taxes. Of the $1.1 trillion in annual program costs in 2020 (98% of which are paid in benefits), almost 90% was covered by payroll taxes, approximately 3% was covered by taxation of the Social Security benefits transferred from the general government account to the program, and over 7% was covered by interest earned on the bonds held in the combined retirement and disability trust funds paid by the federal government. Yet according to the Social Security trustees, the trust funds began to shrink in 2021 — and by 2034, they will be exhausted. At that point, payroll taxes and taxes on benefits will only be able to pay 78% of program costs. The projected shortfall over the next 75 years is 3.54% of payroll, up from a 2.66% deficit in 2016. The cost of the program is also projected to increase, from the current 5% of GDP to more than 6% by 2080, while non-interest income remains essentially flat, at about 4.5% of GDP. Although long and covering three or so generations, the 75-year horizon is arbitrary, and it cuts off additional years of deficit as well as future generations. The trustees, therefore, also calculate the shortfall over an infinite time horizon. On that basis, the deficit is now at 4.6% of payroll — up from 4% in 2016. The program represents a considerable drain on the federal government's finances. Since 2010, Social Security has paid out more in benefits and expenses than it has collected in taxes and other non-interest income. This drain is projected to grow from about 2% of taxable payroll in the 2020s to about 3.5% in the year of program insolvency, and to almost 5% by around 2075 if scheduled benefits continue. The recent pandemic-induced recession hit Social Security especially hard, increasing the deficit and drawing the insolvency date forward by a year, to 2033. The Concord Coalition recently produced some insightful analysis on the implications of Social Security's worsening finances for the federal government. According to the coalition, as the trust funds approach exhaustion and the federal government redeems its bonds to continue to pay Social Security benefits, publicly held debt will increase as a result — by almost $6 trillion by 2035. Even with today's unprecedented public-debt standards, that increase represents a large burden: about 15% of the year's projected GDP. In terms of interest cost, the added annual burden on public finances grows to almost 1% of GDP. Although there are many reasons for this grim state of affairs, the demographic challenge is a primary driver. The number of retired workers is projected to double in about 50 years as members of the post-World War II Baby Boom generation continue to retire in increasing numbers. People are also living longer, while the birth rate has dropped in recent years. As a result, the trustees project that the ratio of 2.7 workers paying Social Security taxes to each person collecting benefits in 2020 will fall to 2.2 in 2039 — and slide further thereafter. Even this sober assessment may be too rosy, because the trustees assume that the birth rate will increase to 2.0 children per woman in their intermediate scenario. In reality, the rate has fallen from over 2.0 in the mid-2000s to 1.65 in 2020. While some of the decline may be temporary as women postpone childbearing, strong survey evidence and analysis by researchers at Boston College indicate that most, if not all, of the fertility slide is permanent. For example, surveys of the total births expected among women ages 20 to 24 show a decline from 2.46 in 1982 to 2.09 between 2017 and 2019. Further analysis finds a gap of about 0.45 children between projected completed fertility and expectations of fertility at younger ages. All this points to a more reasonable projection of a future birth rate closer to 1.65 (the current rate), rather than the trustees' projected rate of 2.0. As a result, the long-run finances of Social Security are much worse than the trustees project.