For most of the history of Social Security, Americans have paid more into the system each year than the benefits paid out.  However, the difference between taxes and benefits paid has been relatively small, again emphasizing that Social Security is a generational transfer of income, not a retirement savings system.  Since 1970, the differences between inflows and outflows have varied widely, but on average we have paid in about 3% more than the benefits paid out.

However, since 2010 we have averaged paying out 7% more in benefits than the taxes collected.  The last time Social Security ran deficits was from the early 1970s through the early 1980s as the U.S. population pyramid began to steepen.  That led to what many have dubbed the “Grand Bargain” between President Ronald Reagan and House Speaker Tip O’Neil in 1983.  Their reform of the system stabilized it by increasing the payroll tax rate, taxing Social Security benefits and by gradually raising the retirement age.  At the time, backers of the plan believed it would permanently shore up Social Security’s financial future.

However, by as early as themid-1990s, actuaries begin to warn that the demographics were once again trending against the system as the birth rate continued to fall and life expectancies increased.  Current estimates are that Social Security’s reserves will be exhausted in 2034. Thereafter, the system will only have enough income to pay about 80% of the currently scheduled benefits.  This assumes a continuation of the current payroll tax rate and that the taxable income base to which the payroll tax applies will increase only by the inflation index for each year.

Many of the proposals to reform Social Security are focused on making sure it will be able to continue paying full benefits after 2034.  This is a great summary of many of the various alternatives by the American Academy of Actuaries.  

The bad news, however, is that the condition continues to worsen after 2034.  Based on the projections in this year’s Trustees’ Report the annual deficits will top out in the 2070s at around 27% if no changes are made.

A slight silver lining is that the current projections assume that the US population flattens out in the later part of this century but does not suffer any significant decline.  At that point our population pyramid will be a rectangle and Social Security should be in a steady state, needing a combination of about 25% more revenue or cost reductions from where we are now.

It is important to remember that these are projections.  As Yogi Berra famously said, “Predictions are hard, especially about the future.”*  The Trustees’ Report has alternative high and low projections that show a shortfall of nearly 100% on the high side and only10% on the low side.  The main drivers of the variation is future population growth and the health of the US economy.

We are in uncharted territory with the current dramatic decline in the fertility rate.  After centuries of high birth rates, it was only about five decades ago that women began having fewer children.  Will that persist?  It is hard to imagine now that couples are going to want to start having large families again, but then no one really sawthe collapse in the fertility rate we are currently experiencing.  Even a small increase in the fertility rate could have a large effect on Social Security’s future.

There is also the issue of immigration.  Currently much of the public is focused on the burden of the large number of immigrants entering the country.  But having workers who are here legally and paying payroll taxes into the system would improve Social Security’s prospects.  Ironically, the thousands of illegal immigrates who use fake Social Security cards pay taxes into the system but will never collect benefits.  That currently adds about $12 billion to the system’s reserves annually.

Then there are potential unanticipated black swan events like, say, a pandemic. I am not certain that the current projections have fully accounted for the effect COVID will have on the numbers.  There were about a million seniors who died prematurely in the pandemic which was about1.5% of all Social Security beneficiaries. We also have recently seen a decline in life expectancies, which few expected. But a reversal of that trend or a medical breakthrough, like say curing cancer, would put more pressure on the system.

Regardless, it is clear Social Security will not be able to pay the current level of benefits within the next decade. So, Congress needs to act.  The sooner it does the less drastic the corrections will need to be.  But I am not holding my breath, especially not in an election year.

Next time we will be looking at some of the upsides and downsides to some of the popularly discussed alternatives.

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Note: I have frequently used this Yogi Berra quote, but someone recently called ot my attention that it did not orginate with him. As with many famous quotes, this one has a complicated origin history, lending credence to the adage there is no such thing as an original thought.