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The Cost to Fix Social Security Rose $2.9 Trillion in 2020

By Sean Williams – May 1, 2020 at 6:06AM

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The nation's most important social program has almost $17 trillion in unfunded obligations between 2035 and 2094.

As some of you may be aware, the nation's most successful social program is barreling toward serious trouble.

Despite paying out benefits without fail for more than 80 years, the Social Security Board of Trustees has cautioned lawmakers on Capitol Hill since 1985 that long-term revenue collection would be insufficient to maintain the program's existing payout schedule, inclusive of cost-of-living adjustments. The newly released Trustees report for 2020 echoed this same sentiment, but with an added twist.

Two Social Security cards lying atop a fanned pile of cash.

Image source: Getty Images.

Social Security's asset reserves may be exhausted by 2035

The 2020 Board of Trustees report featured a number of similar concerns we've seen before. For instance, the latest outlook suggests that Social Security will begin outlaying more money than it collects in 2021, which is actually a year later than it predicted in the 2019 report. Nevertheless, it implies that a clear inflection point is around the corner for Social Security and the existing payout schedule isn't sustainable without significant changes to the program.

In line with the 2019 report, we learned that the Trustees are still expecting a complete depletion of the program's nearly $2.9 trillion in asset reserves by 2035. These asset reserves are Social Security's net cash surpluses built up since inception. As demographic factors change, these annual surpluses are expected to shift to very large net cash outflows. Between 2021 and 2035, these outflows are expected to completely whittle away the program's $2.9 trillion in asset reserves.

But keep in mind that Social Security doesn't need a dime in asset reserves to remain solvent. Its two forms of recurring revenue (the payroll tax and taxation of benefits) ensure that it can't go bankrupt. Whether you're already retired or planning to take Social Security in 40 years, you'll receive a benefit, assuming you've earned the requisite number of lifetime work credits.

However, one figure in the Trustees report really stood out -- and not in a good way.

A golden key placed atop two Social Security cards.

Image source: Getty Images.

It just became a lot more expensive to fix Social Security

Every year, the Trustees examine the aggregate long-term cash shortfall for Social Security between its estimated asset reserve depletion date and the 75th year from the date of an issued report ("long-term" is defined as 75 years by the Trustees). In 2015, for example, the unfunded obligations for the Old-Age and Survivor Insurance (OASI) Trust and Disability Insurance (DI) Trust was a combined $10.7 trillion. Last year, in 2019, it was $13.9 trillion. But in the newest report, it's a whopping $16.8 trillion, representing a year-on-year increase of $2.9 trillion. 

How on Earth did Social Security's long-term outlook erode so badly in just one year's time? The Trustees offered a pretty detailed glimpse into their methodology in the 2020 report.

But before digging into the details, it first helps to understand how the Trustees measure this unfunded obligation via the actuarial deficit. The actuarial deficit describes the percentage increase needed in the payroll tax today to ensure continued solvency for the Social Security program at the current payout schedule, inclusive of cost-of-living adjustments. It also requires that, by the end of the 75th year, the program has enough in asset reserves to cover payouts for one full year.

Between 2019 and 2020, the actuarial deficit rose 43 basis points to 3.21% from 2.78%. This is to say that in order to resolve Social Security's long-term unfunded obligations, the Trustees recommend raising the payroll tax from its current rate of 12.4% -- you and your employer often split this tax down the middle, with each owing 6.2% -- to 15.61% (12.4% plus 3.21%). This would mean workers would be paying 7.805% of their incomes into Social Security instead of 6.2%, and the self-employed would pony up the full 15.61% instead of 12.4%.

Here's why resolving Social Security's shortcomings is now much pricier

With that explanation out of the way, let's dig into the details. Here's a summary of what changed between the 2019 and 2020 reports:

A detailed table showing why Social Security's actuarial deficit rose to 3.21% in 2020 from 2.78% in 2019.

Image source: The Social Security Board Trustees 2020 annual report summary.

What you'll notice is that there are four factors driving up the cost to eventually fix Social Security. The biggest factor of all is "economic and data assumption" changes. Within this category, we saw the Board of Trustees lower its long-term rate of price inflation from 2.6% to 2.4%, as well as reduce its real interest rate outlook from 2.5% to 2.3% over the long run. Fourth-quarter gross domestic product (GDP) growth also came in below expectations. Combined, these factors account for virtually all of the 18 basis-point actuarial deficit increase in this category.

Next up is the 13 basis-point worsening in "demographic data and assumptions." The biggest change here is the lowering in the long-term fertility rate to 1.95 births per woman from 2.0. With U.S. births hitting an all-time low and millennials waiting longer to get married, there's the real possibility that the worker-to-beneficiary ratio will worsen over time.

Legislative and regulatory changes wound up worsening the actuarial deficit by an additional 12 basis points. Pretty much the entirety of this increase is based on the repeal of the Cadillac tax associated with the Affordable Care Act in December 2019. The Cadillac tax was an excise tax on employer-sponsored group health insurance premiums above a specified level. As a result, group health insurance premiums will grow over time, cutting into the amount of wages paid to workers, thereby reducing long-term payroll tax collection.

A person using binoculars to look into the horizon.

Image source: Getty Images.

Lastly, the valuation period examined by the Trustees changed, and lowered the actuarial deficit by 5 basis points. This is simply to say that the Board examined the 2020 to 2094 time period, rather than 2019 to 2093.

The one positive is that a lower expected disability incidence rate will lower the actual deficit by 5 basis points over the long run. Nonetheless, numerous changes to the long-term outlook suggest that fixing Social Security won't be cheap.

What's more, the longer Congress waits to act, the costlier the fix will be. Since previous amendments to the Social Security program have involved a combination of long-term outlay reductions and increases in the payroll tax, a long wait simply means a bigger burden on working Americans.

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