When it comes to projecting Social Security's financial future, the Social Security Trustees Report contains three sets of estimates that make different assumptions about things like future birth rates, economic growth, inflation, wage growth, interest rates, and more. They are known as the intermediate, low-cost, and high-cost scenarios.
All of the headline estimates about Social Security's future, including the projection that it will run out of money in the trust funds by 2035, are based on the intermediate estimates.
Just to name a few of the assumptions made in the intermediate scenarios, it assumes that the total fertility rate (number of children per woman) will be 1.9 in 2040 and beyond, with 1.63% annualized economic growth, 2.4% annual average inflation, 3.56% annual wage growth, a 4.5% unemployment rate, and a 2.3% average interest rate on the Treasury securities Social Security holds. However, there's no guarantee that these will be the actual numbers, and that's why it's important to know the other two scenarios and what they mean.
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The low-cost scenario is entirely possible
Of course, these are just the median estimates, but if they were to shift in certain directions, it would be a good thing for Social Security. Just to name a few reasons:
- Higher fertility rates mean that there will be more workers paying into Social Security.
- Lower unemployment rates also mean that more of the available workforce will have Social Security-taxable income.
- Higher Treasury security interest rates mean more interest income flowing into the program from Social Security's reserves.
- Faster wage growth would mean more total income that could be subject to Social Security tax.
The low-cost scenario makes more aggressive, but entirely plausible, assumptions about these and other things. For example, it assumes:
- Fertility rate of 2.1 children per woman.
- Average economic growth rate of 1.93%.
- 0% average inflation rate.
- 79% average wage growth (1.74% after inflation).
- 5% unemployment rate.
- 8% average interest rate on new Treasury securities.
It also assumes a higher rate of immigration into the United States (both legal permanent residents and otherwise), which would mean more people paying into the system.
We'll get into what this would mean in the next section, but the takeaway is that none of this would be too far-fetched. These are all things that are well within the realm of possibilities. And if you're curious, the high-cost estimate assumes a lower fertility rate of 1.6 children, a more sluggish 1.33% economic growth rate, 1.8% annual inflation, and 5.5% average unemployment, just to name a few.
What does it mean to you?
As the headlines say, Social Security's trust funds are expected to run out of money in 2035, based on the intermediate assumptions. If the high-cost assumptions prove accurate, the projected out-of-money date is accelerated to 2032.
On the other hand, under the low-cost scenario, the Social Security trust funds wouldn't be depleted until 2080, 45 years later than expected. What's more, they would once again start to build back up a few years later.
To be perfectly clear, I'm not saying that the low-cost scenario is likely to happen, or that Social Security doesn't need reforms. It absolutely does. The fact that even under the most aggressive assumptions Social Security will eventually run out of money is a problem.
However, my point is that when you see headlines about how Social Security will run out of money in 2035, it's important to know that isn't a set-in-stone date. After all, between the low-cost and high-cost assumptions, that is a 48-year window during which Social Security runs out of money. There's a lot of uncertainty, so when you see headlines like "only 10 years until Social Security is out of money," take them with a big grain of salt.
