Social Security Reserves Projected to Run Out Earlier Than Previously Forecast

Lower birthrates over the past few decades combined with a wave of retiring baby boomers have challenged the long-term solvency of Social Security, which pays benefits to retirees, their survivors and people with disabilities.

In 2021, Social Security began paying more in benefits than it was receiving through payroll taxes and interest on the specially issued Treasury securities it holds in reserve. That has reduced the size of its trust fund to $2.8 trillion in 2022 from $2.9 trillion in 2020.

The trust fund will continue to shrink until 2034, when it will run out of money, the report said. After that, benefits will have to be cut to account for lower revenues.

A separate report on Medicare showed that its finances are improving thanks to lower projected healthcare spending than in last year’s report. Medicare’s Hospital Insurance Trust Fund will be able to cover all benefits until 2031, three longer than forecast last year, the report said.

Democrats and Republicans are expected to launch spending talks this year, but any changes to Social Security or Medicare are off the table in negotiations around raising the nation’s borrowing limit. Republicans want deep spending cuts as a condition for backing a debt-ceiling increase, but they acknowledge that any changes to entitlements would be dead on arrival and politically radioactive unless they have broad bipartisan support.

To improve Social Security’s long-term finances, Congress could cut benefits, raise taxes or a combination of the two.

To keep the program solvent for the next 75 years, taxes would have to immediately rise 3.44 percentage points to 15.84%, split between employees and employers, the Social Security trustees’ report said. Right now, employees and employers both contribute 6.2% of payroll, for a combined 12.4% tax rate.

An immediate 21.3% cut in benefits would also put the program on sounder footing without raising taxes, the report said.

Slower-than-expected economic growth and higher-than-expected inflation reduced the projected level of gross domestic product and labor productivity by 3% over the 75-year projection period compared with last year’s estimates, the report said. Inflation-adjusted interest rates are also expected to be higher than forecast in last year’s report.

The U.S. economy slowed last year, following a strong rebound in 2021 as pandemic-related disruptions eased. GDP rose 0.9% in the fourth quarter of 2022 over the same quarter a year ago, down from 5.7% in 2021, the Commerce Department reported Thursday.

Federal Reserve officials expect it to slow further this year, to 0.4%.

Inflation has also been pushing up the cost of the program. Social Security checks are 8.7% bigger this year, to account for last year’s rapid rise in consumer prices, the largest increase since 1981.

Social Security officials expect slower inflation will reduce next year’s benefit increase to 3.3%.

Under the program’s rules, each year’s tax and interest income is used to pay that year’s benefits. What is left over is deposited in the trust fund. Over the past few decades, the program’s benefits have grown faster than its income, reflecting a slowdown in the growth of the labor force combined with a wave of retirements.

In 2022, there were 2.8 workers for every beneficiary, down from more than 3 between 1974 and 2008. That ratio will fall to 2.3 by 2035, putting pressure on the program’s ability to pay benefits, the report said.

Write to David Harrison at [email protected]

Lower birthrates over the past few decades combined with a wave of retiring baby boomers have challenged the long-term solvency of Social Security, which pays benefits to retirees, their survivors and people with disabilities.

In 2021, Social Security began paying more in benefits than it was receiving through payroll taxes and interest on the specially issued Treasury securities it holds in reserve. That has reduced the size of its trust fund to $2.8 trillion in 2022 from $2.9 trillion in 2020.

The trust fund will continue to shrink until 2034, when it will run out of money, the report said. After that, benefits will have to be cut to account for lower revenues.

A separate report on Medicare showed that its finances are improving thanks to lower projected healthcare spending than in last year’s report. Medicare’s Hospital Insurance Trust Fund will be able to cover all benefits until 2031, three longer than forecast last year, the report said.

Democrats and Republicans are expected to launch spending talks this year, but any changes to Social Security or Medicare are off the table in negotiations around raising the nation’s borrowing limit. Republicans want deep spending cuts as a condition for backing a debt-ceiling increase, but they acknowledge that any changes to entitlements would be dead on arrival and politically radioactive unless they have broad bipartisan support.

To improve Social Security’s long-term finances, Congress could cut benefits, raise taxes or a combination of the two.

To keep the program solvent for the next 75 years, taxes would have to immediately rise 3.44 percentage points to 15.84%, split between employees and employers, the Social Security trustees’ report said. Right now, employees and employers both contribute 6.2% of payroll, for a combined 12.4% tax rate.

An immediate 21.3% cut in benefits would also put the program on sounder footing without raising taxes, the report said.

Slower-than-expected economic growth and higher-than-expected inflation reduced the projected level of gross domestic product and labor productivity by 3% over the 75-year projection period compared with last year’s estimates, the report said. Inflation-adjusted interest rates are also expected to be higher than forecast in last year’s report.

The U.S. economy slowed last year, following a strong rebound in 2021 as pandemic-related disruptions eased. GDP rose 0.9% in the fourth quarter of 2022 over the same quarter a year ago, down from 5.7% in 2021, the Commerce Department reported Thursday.

Federal Reserve officials expect it to slow further this year, to 0.4%.

Inflation has also been pushing up the cost of the program. Social Security checks are 8.7% bigger this year, to account for last year’s rapid rise in consumer prices, the largest increase since 1981.

Social Security officials expect slower inflation will reduce next year’s benefit increase to 3.3%.

Under the program’s rules, each year’s tax and interest income is used to pay that year’s benefits. What is left over is deposited in the trust fund. Over the past few decades, the program’s benefits have grown faster than its income, reflecting a slowdown in the growth of the labor force combined with a wave of retirements.

In 2022, there were 2.8 workers for every beneficiary, down from more than 3 between 1974 and 2008. That ratio will fall to 2.3 by 2035, putting pressure on the program’s ability to pay benefits, the report said.

Write to David Harrison at [email protected]