By Stephen Smoot
One of the key components of the retirement planning of most Americans lies in the Old Age, Survivors, and Disability Insurance program. Old Age and Survivors Insurance provides what many think of as Social Security benefits paid to those at or above the retirement age. The second component lies in the Disability Insurance program.
Financial operations of both annually come under the review of a board of trustees established by the Social Security Act. This board includes the United States Secretary of the Treasury serving as managing trustee, the U.S. Secretary of Labor, the U.S. Secretary of Health and Human Services, and the U.S. Commissioner of Social Security.
Two other positions on the board are appointed and confirmed by the United States Senate, but as of last December, President Joe Biden had not filled those positions.
One of the most important functions of that board takes place every December. For 84 years, it has provided annual reports “on the actuarial status and financial operations of the OASI and DI Trust Funds.”
These reports come based on assumptions about the economy, demographics, and other factors set in the previous December. Assumptions tell much about the state of the nation in some key areas.
First, the report established the conditions under which Social Security operated as of 2023. Approximately 67 million received benefits from either of the two OASDI sources. Of that, 53 million received retirement related benefits, six million received payments because they survived deceased workers, and nine million received benefits for being disabled or the dependent of a disabled person.
“The DI program continued to have low levels of disability applications and benefit awards through 2023,” the report shared, then explained that “disability applications have declined since 2010 and the total number of disabled-worker beneficiaries in current payment status has been falling since 2014.
That said, the report assumed that “disability applications are expected to rise gradually from current low levels,” which takes a (nonpolitical, but financially speaking) conservative approach to estimating future trends.
In 2023, the total cost of Social Security totaled about $1.392 billion while it took in a total income of $1,351 billion. The report added that “asset reserves held in special issue U.S. Treasury securities declined from $2,830 billion” in January 2023 to $2,788 at the close of the year.
The report indicates that Social Security’s serious troubles have already started. “Under the trustees’ intermediate assumptions,” it states, “Social Security’s total cost is projected to be higher than its total income in 2024 and all later years.” Costs started to exceed income in 2021 and it has exceeded its income not counting interest accrued since 2010.
Reserves will start dropping sharply in the next eight years, according to the board. The $2,788 billion held in January 2024 will shrink to $551 billion by 2033, the end of what Social Security regards as the short-term future for the purposes of reporting and planning.
In 2030 reserves will drop to 84 percent of costs, then 25 percent in 2033, if all conditions remain the same. When reserves drop below 100 percent of cost, “the combined OASI and DI Trust Funds fail the trustees’ test of short-range financial adequacy.” Taken separately, DI’s finances show much more stability than OASI, even in the long-term.
Reserves will be completely depleted by 2035 under current conditions.
Social Security regards “long-range” as extending through 2098.
“OASDI cost has generally increased much more rapidly than taxable payroll since 2008 and is projected to do so through 2040,” states the report. It goes on to explain that “the retirement of baby boom workers is increasing the beneficiaries much faster than the increase in number of covered workers.”
Part of the problem lies in lower birth rates. The board of trustees lowered the expected fertility rate from 2.0 to 1.9 as birthrates drop. After 2040, the trustees predict that the growth of the cost rate will gradually drop as the growth rate of new beneficiaries also declines.
This all adds up to a predicted shortfall of $22.6 trillion in January 2024. Trustees state that, assuming conditions remain as predicted, “revenue would have to increase by an amount equivalent to an immediate (as of January 2024) 3.33 percentage points to 15.73 percent” and “scheduled benefits would have to be reduced to an amount equivalent to an immediate and permanent reduction of 20.8 percent applied to all current and future beneficiaries effective in January 2024.”
Should officials wait until the “drop dead” year of 2035, the payroll tax would have to rise just under 17 percent while benefits would have to drop by almost one quarter.
Conditions can change, however. If the attempted reorientation from a service economy to one centered on manufacturing under President Donald Trump succeeds, it will bring higher paying jobs, and thus more revenue. Younger generations may choose to have a stronger family orientation going forward. More children means more workers and more revenues.
Although a common accusation, neither the United States Congress nor any federal agency “raided” Social Security. The law allows lending between the OASI, DI, and the Medicare Trust Funds so that each fund can help the others, when needed, get through short-term cash flow issues.
Social Security’s problems stem mainly from demographics trends, such as the post World War II surge in births, that its creators could not have anticipated in the 1930s. Additionally, its original design saw it as supplemental income for retirees, not a sole source of post employment income for anyone. For many Americans, however, it has developed into the main or only income source for the household.
The slowly developing crisis in Social Security represents a canary in the federal government coal mine. Earlier this year, economic expert Stephen Moore wrote in the New York Post that “in the last 12 months the debt rose by another $2 trillion. It’s as if borrowing is Congress’ crack cocaine habit” and stated that “both parties are addicted.”
He explained that such a condition could “trigger a financial crisis, or runaway inflation, due to its rivers of red ink.”
