Whether you realize it or not, big things are happening with America's most important social program.

Beginning this year, Social Security will pay out an estimated $1.7 billion more in benefits than it generates in revenue. That's peanuts compared to the projected $1 trillion in income the program is expected to generate, and the nearly $2.9 trillion in asset reserves it'll hold by year's end. Nevertheless, the first net cash outflow since 1982 signals that a major shift is now under way with Social Security.

Two Social Security cards and a small pile of hundred dollar bills lying atop a Social Security benefit calculations card.

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The good news, if any can be extracted from Social Security's numerous woes, is that the program is in absolutely no danger of going bankrupt. Money will continuously be flowing into Social Security thanks to its 12.4% payroll tax on wage income, as well as the taxation of benefits. The former was responsible for over 87% of the program's revenue in 2017, meaning the payroll tax will almost singlehandedly keep Social Security out of insolvency.

Still, this pattern suggests that the current payout schedule isn't sustainable. By 2034, Social Security's $2.9 trillion in excess cash is forecast to be gone. By such time, if lawmakers haven't found a way to generate additional revenue and/or cut expenditures, an across-the-board benefits cut of up to 21% may be needed. A cut of this magnitude would supposedly spare beneficiaries from any additional cuts until 2092, but it would nonetheless wallop current and future generations of retired workers who are in some capacity reliant on the program (often 80% to 90% of total beneficiaries).

Social Security has no shortage of problems, but most can be easily resolved

What's causing this degradation in Social Security? Well, all the usual culprits come to mind, such as:

  • The retirement of baby boomers from the workforce, which is weighing down the worker-to-beneficiary ratio.
  • Increased longevity over the course of many decades. Since 1960, the average life expectancy has increased by roughly nine years.
  • Growing income inequality that's allowed the rich to live notably longer than the poor, while collecting a fatter-than-average benefit check in the process.
  • Congressional inaction. The last time lawmakers passed sweeping Social Security reforms was all the way back in 1983.
A mature couple going over the finances on a laptop, with the husband clearly irritated.

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Each of these issues (ahem, including the last one) could be tackled through congressional action. Or, in simpler terms, bipartisan cooperation could yield a Social Security reform bill that would increase payroll taxes on the wealthy, raising additional revenue for Social Security, while also gradually increasing the full retirement age and accounting for increased longevity. This would allow the core proposal for Democrats and Republicans to be represented, and it would, according to the intermediate-cost model projections, resolve Social Security's $13.2 trillion cash shortfall between 2034 and 2092.

Here's an issue even Congress can't fix

However, not even Congress could wave its wand and make one of Social Security's most daunting problems disappear: low fertility rates.

According to a report from The New York Times in February, based on data from the Centers for Disease Control and Prevention in September 2017, lifetime births per woman fell to 1.77, which is the lowest fertility rate in the U.S. since 1976. It's down almost 4% since 2015, and a considerable 16.4% since a recent peak in 2007, when the U.S. economy and stock market were firing on all cylinders.

Generally speaking, a number of economic and social factors can affect birth rates in the United States. While the Great Recession and high unemployment rates have long been blamed for pushing birth rates down in recent years, a now-bustling economy, and a stock market that's hit multiple new highs, haven't turned around a still-declining birth rate.

Parents holding their newborn baby.

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The New York Times attributes this decline to a number of factors. One is that millennials are postponing marriage. With the younger generation waiting longer to get married, we've seen it take longer for the average first child to be born. Although, to be clear, the data also shows that unmarried parents have produced fewer children, too.

The report also suggests that long-acting reversible contraceptives have further reduced the likelihood of an unwanted or unplanned pregnancy. Meanwhile, technologies designed to increase the chances of a successful pregnancy, such as in vitro fertilization, remain very expensive and out of the budget of many younger couples.

Perhaps what's scariest of all is that the average age a woman has her first child, 26, is still the lowest in the U.S. of all developed countries. Throughout Europe, women don't have their first child until their early 30s, suggesting that this trend of later and lower birth rates may have room to continue. 

Why low fertility rates could be a very serious problem for Social Security

The intermediate-cost model Social Security uses assumes that fertility rates will level off around 2.0 lifetime births per woman. To note, we have seen a dip in fertility rates to this level before and rebounded to more than 2.0 lifetime births per woman, so it's not as if history hasn't paved the way before. However, the New York Times data clearly shows that birth trends aren't shifting higher, despite a healthier economy. That hasn't happened before.

The reason this is so concerning is it would mean a growing number of beneficiaries and slower growth in productivity and the workforce. The intermediate-cost model has forecast a drop in the worker-to-beneficiary ratio from 2.8-to-1 in 2017 to 2.2-to-1 by 2035. Eventually this well settle at 2.0-to-1 by 2095, with an estimated 49 beneficiaries per 100 covered workers.

An empty crib with a stuffed animal bear lying in the corner.

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However, under the low-fertility (i.e., high-cost) model, which assumes a steady lifetime birth rate of 1.8 per woman, the worker-to-beneficiary ratio plummets over the long term to 1.6-to-1 by 2095, or 62 beneficiaries per 100 covered workers. 

Now, what's this all mean in English? Essentially, if fertility rates don't recover, the cost to fix Social Security is going to be significantly more than the intermediate-cost model projects.

Right now, the actuarial deficit is 2.84% under the intermediate-cost model. Put another way, an estimated payroll tax increase of 2.84% would be needed today to keep Social Security solvent through 2092 without any additional benefit cuts, while ensuring that it has enough in asset reserves to cover a full year of payouts by 2092. That means an across-the-board payroll tax increase to 15.24% (12.4% plus 2.84%) on wage income of up to $128,400 (as of 2018) would be necessary to avoid cutting benefits. But if the low fertility scenario plays out, a 3.25% increase would be needed today, or a payroll tax of 15.65%, as an aggregate.

Furthermore, assuming we stayed on the current payout schedule, annual expenditures would outpace income by 4.32% in 2092, based on the intermediate-cost model, and by a considerably scarier 5.84% under the high-cost, low-fertility model. 

To be clear, no one knows what's going to happen with fertility rates in the future. But if birth rates continue to trend lower for an extended period of time, Social Security could find itself with less payroll tax revenue, a falling worker-to-beneficiary ratio, and much bigger problems than first imagined.