Just in case you haven't heard, Social Security, our nation's most storied social program, is facing some serious hurdles in the years to come.

Since 1985, the annually released report from the Social Security Board of Trustees has cautioned that the program would not have sufficient revenue over the long term (defined as 75 years from the release of a report) to cover outgoing expenditures. Over the past 35 years, the estimated period of time that it would take to deplete Social Security's asset reserves (i.e., its net cash surpluses built up over time) has decreased considerably. Based on the 2020 report, Social Security's $2.9 trillion in asset reserves is projected to be exhausted by 2035.

A person tightly gripping a Social Security card between their thumb and ring finger.

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Boomers retiring is far from Social Security's only problem

To be crystal clear, Social Security doesn't need a dime in its asset reserves to remain solvent. Its recurring sources of revenue, such as the 12.4% payroll tax on earned income and the taxation of benefits, ensure that money is always flowing into the program for disbursement to eligible beneficiaries. But a depletion of the program's asset reserves opens Social Security to across-the-board benefit cuts of up to 24% for retired workers in just 15 years.

How does such a successful social program, known for its net cash surpluses, go downhill so quickly? Most of the finger-pointing goes to baby boomers, who are retiring from the labor force in record numbers and pushing the worker-to-beneficiary ratio lower. However, blaming boomers for simply being born paints a very narrow picture of what's really wrong with Social Security.

For example, increased longevity is a serious problem that's been predominantly swept under the rug. Don't get me wrong... living longer is a positive thing. But for a program that, in the 1940s was designed to pay beneficiaries for a matter of years, it's now supplying a benefit to recipients for perhaps two or more decades.

Rising income inequality is also a problem. Since the well-to-do have little or no financial constraints when it comes to receiving preventative care, medical care, or prescription medicines, they tend to handily outlive lower-income recipients. This means the wealthy are netting a bigger payout from Social Security for a longer period of time.

But perhaps the most serious issue with Social Security, and the one that gets the least attention, is the persistent decline in births per woman over the past decade.

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A significant decline in births could cost Social Security dearly

The idea here is pretty simple to understand. When the Trustees model numerous variables for the Social Security program over the next 75 years -- such as gross domestic product growth, inflation rates, wage growth, death rates, net immigration rate, and so on -- one of the factors considered is the fertility rate, i.e., the average number of children born to women of childbearing age (15-44). A steady number of births are needed annually to provide the future with enough working Americans to offset (or potentially more than offset) the number of workers retiring and claiming Social Security benefits. If birth rates decline by a considerable amount, there won't be enough new workers entering the labor force in, say, 20 years to keep the worker-to-beneficiary ratio from falling.

For as long as I can recall, the Trustees had assumed that a fertility rate of 2.0 would be the long-term average, and thusly used this figure in their intermediate-cost model. In this sense, "intermediate" means the most-likely-to-happen model.

But in the 2020 report, the Trustees lowered this intermediate projection by 5 basis points to 1.95 births per woman of childbearing age. That doesn't sound like much, but this change wound up increasing the actuarial deficit by 11 basis points.

The actuarial deficit is the amount the payroll tax would need to increase today to keep the program solvent over the long run, as well as ensure there was a full year of payouts held in reserves by the end of the 75th year from the release of a report. Since a 43 basis-point increase in the actuarial deficit led to a $2.9 trillion increase in the program's long-term cash shortfall in 2020, it's safe to say that an 11 basis-point increase isn't as benign as it sounds.

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The thing is, an 11-basis-point increase in the actuarial deficit might be wishful thinking. According to the report, it's estimated that the fertility rate hit an all-time low in 2019 of 1.68 births per woman, after previously hitting a record low of 1.73 births per woman in 2018. It's unclear if births will level off at these depressed levels, but if they do, fixing Social Security's funding gap between 2035 and 2094 will become considerably more expensive

Under the high-cost model, which assumes a long-term average fertility rate of 1.75 births per woman of childbearing age, the actuarial deficit increases by 44 basis points from the intermediate-cost model. Over 75 years, we're talking about adding $3 trillion in additional unfunded obligations. If the fertility rate leveled off at 1.68, the cash shortfall balloons to about $4 trillion over the next 75 years. Mind you, this comes atop the $16.8 trillion in unfunded obligations estimated by the Trustees in the 2020 report. 

Why are American birth rates at historic lows?

The question you're probably asking is, "Why are American birth rates declining?" It's impossible to point to any one variable. Rather, researchers believe a variety of factors are responsible for the persistent drop-off over the past decade.

For example, millennials are waiting longer to get married than their parents (an average of 4.9 years), and when they do get married, they're older than when their parents or grandparents were married. Put plainly, this means waiting longer to start a family. 

A teddy bear propped up in the corner of an otherwise empty crib.

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We've also witnessed a decline in unplanned pregnancies. A study published by the National Bureau of Economic Research in 2017 showed that the number of unintended births between 2007 and 2017 had declined 16%. This was entirely driven by fewer unplanned pregnancies for women under the age of 30, as the study noted that birth rates for women over the age of 30 had increased over this period. 

Another point of blame cited by researchers is easier access to contraceptive devices and pharmaceuticals. As access to contraceptives has improved, avoiding unintended pregnancies has become easier.

Finally, the economy likely deserves some of the blame. Remember, millennials grew up during the dot-com bubble, entered the workforce en masse right around the time of the Great Recession, and are now living through an unprecedented economic disruption caused by the coronavirus disease 2019 (COVID-19). With couples struggling to pay bills or save, it's not economically viable for them to have children right now.

Ultimately, whatever the reasons are for declining birth rates, the fact remains that if this trend doesn't reverse soon, bridging Social Security's long-term unfunded obligations is going to be even costlier for working Americans.