Last Friday, the Trustees issued their annual Report on the current and projected financial condition of the Social Security program. Their analysis showed that its prospects worsened in the past year. The projected year of exhaustion of the Fund paying for retirement and survivor benefits has moved up one year to 2033 from 2034, just ten years from now, when benefits will have to be cut by 23 percent, and the total program shortfall in expected revenues less benefit expenditures over the next 75 years has grown to -3.61 percent of taxable payroll, down from -3.42 percent last year. Although the Trustees made several changes in assumptions, methods and data, mainly for the near-term, these are largely offsetting and small. The main reason for the deterioration lies in an expectation that economic growth will be lower in the near-term and there will be no bounce-back.

The Trustees say that in response to higher-than-expected inflation rates and lower-than-expected output growth, the levels of GDP and labor productivity were revised down by 3.0 percent by 2026 and for all years thereafter. This change decreases the actuarial balance by 0.13 percent of taxable payroll. Combined with the usual annual loss of 0.05 percent from changing the valuation period to include the relatively large annual negative balance for the new end-year of the analysis, this more sober view nearly entirely accounts for this year’s deterioration. It is worth noting that since the last major Social Security reform in 1983, nearly two-thirds of the steady deterioration of the program’s finances is fully expected and comes from the march of time, which represents the aging of the baby boom generation and the drop in the birth rate. The rest of the long-term decline is caused by a jumpy but on net lowered economic outlook and worse experience with the disability segment of the program.

As I have shown in the past, the projection in the Report is still likely too optimistic, both in the near-term and the long-term. As shown in the table below, the Trustees were too optimistic about a lowering of price inflation reducing benefit increases and a rise in wage inflation increasing taxes collected in 2022 (compare 2022 Report projections for 2022 to actual realizations). Although they have corrected that view in line with reality in the 2023 Report for their projections for 2023 and 2034, compared to the consensus of economic forecasters, they are still too optimistic on price inflation.

Further, the Trustees continue to maintain that the birth rate in the long-run will increase to a nearly full native replacement of 2.0 children per woman, despite a steady and now long-standing fall to around 1.65. If they were to assume that the birth rate increases to only 1.7 children per woman in the out years, the program shortfall would be much larger, at -4.32 percent of payroll over 75 years, and at -6.69 percent in 2097 instead of the current projection of -4.32 percent for that end-year. This latter point is important not only for Social Security but also for the Medicare and health care spending projections by CMS and the federal government budget projections by Treasury and GAO in the Financial Report of the US Government which all use the same set of demographic and economic assumptions.

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