Social Security’s finances after 2022 trustees report

Mythbusting Social Security’s fiscal woes — with numbers and facts

June 27, 2022 12:01 PM

Correcting some misconceptions about Social Security could help financial advisors ease clients’ fears about the program and lead to solutions fixing its long-term solvency.

After the latest trustee’s report earlier this month delivered a bit of a rosier forecast than that of a year ago, a report by Alicia Munnell, the director of the Center for Retirement Research at Boston College, included pushback against some mistaken assumptions that she suggests may be confusing Americans about the nature of Social Security’s manageable 75-year deficit.

The five data charts below using the figures from the report help illustrate why those illusions are false. For one, the program won’t run out of money in 2035, the year that its trust fund runs out. For another, older Americans are struggling with inflation and an “extraordinary” bump in the Medicare Part B premiums, but they technically aren’t living on fixed incomes, according to the report. And Social Security’s Disability Insurance program stands on stable footing because the dwindling number of beneficiaries wiped out the shortfalls in its separate trust fund.

“If you listen to people talk about the disability program, it makes it sound like we have this program that is out of control,” Munnell said in an interview. “The number of people actually collecting benefits has been declining, and so I’m really glad that they changed the assumption and gave official recognition to the fact that the rolls are going down and not up.”

Still, the report states that the issue warrants further study, noting that “a legitimate concern may be whether those who need the help are getting it.”

Regardless, the lower numbers and other factors have added up to one more year for Congress to act to fill in the gap that will be created in 2035 between beneficiaries’ expected benefits and the actual amount they’ll receive in that year. Several lawmakers have introduced reform bills, but none appear likely to pass.

“Every year we wait and that we have waited has made the changes more difficult and more painful,” Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, said at a Senate hearing this month. The current insolvency date will arrive when 54-year-old Americans reach retirement age, she noted.

“The most recent trustees report tells us that Social Security is headed toward insolvency. Of course, that is not news. We have known this for more than 30 years, and yet in that time, we have basically done nothing to shore up the program so that it's financially solvent,” MacGuineas said. “The one thing we know that increases anxiety is uncertainty, and that is what people have today about the future of Social Security.”

To see five charts that explain the current financial picture of the program, scroll down our slideshow. For a look at where Social Security was prior to the pandemic, click here.

Note: All figures come from an analysis of the “2022 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds” by the Center for Retirement Research at Boston College.

The good news

The projected 75-year deficit of Social Security ticked down to 3.42% of taxable payrolls in 2021. “That figure means that if payroll taxes were raised immediately by 3.42 percentage points — about 1.7 percentage points each for the employee and the employer — the government would be able to pay the current package of benefits for everyone who reaches retirement age through 2096, with a one-year reserve at the end,” Munnell wrote in the report.

The reasons

The following factors combined to alter the program’s long-term picture in 2021: adding years that have “a large negative balance” to the calculations, lower fertility rates after the baby boom, immigration assumptions, economic factors and the declining numbers of people collecting disability benefits, according to Munnell’s report. “The trustees did not change any of the ultimate economic or demographic assumptions, and the 75-year deficit declined only very slightly,” she wrote. “Note these calculations were done in February 2022, and the future path of the economy looks more uncertain than it did earlier in the year.”

Some relief on the way

Citing the program’s yearly COLA, Munnell strongly rejects the idea that older Americans are living on fixed incomes. Democratic lawmakers and senior advocates have called for changing the formula for calculating the COLA, but the difference between the existing one and an index called the consumer price index for the elderly has been falling significantly in the past 20 years. In addition, Munnell predicts that there will be no increase in Medicare Part B premiums next year after the substantial 14.5% hikes in 2022 primarily caused by the expected price of an experimental medicine for Alzheimer’s disease.

“The bottom line here is that retirees do not live on fixed incomes; their monthly benefits go up when prices rise,” she wrote. “Yes, the need for a solid number means that the COLA lags a bit as inflation starts, but the COLA will exceed the inflation rate as price increases slow.”

The problem

The expenses of monthly benefit payments will reach nearly a sixth of the country’s gross domestic product and top 5% of taxable payrolls over the next decade. Lower birth rates since the baby boom generation and the fact that people live longer these days have created deficits in the program when measured over several decades. “The combined effects of the retirement of baby boomers and a slow-growing labor force due to the decline in fertility reduce the ratio of workers to retirees from about 3:1 to 2:1 and raise costs commensurately,” Munnell wrote in the report. “In addition, the long-term increase in life expectancies causes costs to continue to increase even after the ratio of workers to retirees stabilizes. The increasing gap between the income and cost rates means that the system is facing a 75-year deficit.”

Ticking clock

Munnell also rejects the view of people who suggest that Social Security is “bankrupt.” The program’s estimated date of insolvency — which means that the program would no longer be able to pay 100% of benefits rather than shutting down altogether — moved back by one year to 2035 last year due to economic growth. However, when the $2 trillion trust fund runs out that year, there would be automatic benefit cuts. The program would be able to pay about 80% of benefits and 74% of them by the end of the century, according to Munnell’s report.

“The point is that the window of opportunity to restore balance has narrowed dramatically over time,” she wrote. “Whereas we used to have 65 years to figure out how to avoid trust fund depletion, that number has dropped to 13 years.”

Whether the actual date ends up being 2033, 2034 or 2035 doesn’t matter to Munnell, she said. The main issue remains that the time is coming up soon. The politics that have stymied any comprehensive reform efforts since the early ‘80s may ironically provide one of the most compelling reasons for optimism, though.

“Congress is going to have to do something,” she said. “No member of Congress wants to be at bat when they announce that they're going to cut Social Security by 20%.”