Social Security Solvency – Solving It Now vs. Later

Note: This post is part of the Social Security Series. Follow the link to see all of my Social Security-related posts.

In May 2024, the Board of Trustees of the two Social Security trust funds released their 2024 Social Security Trustees Report. The Trustees Report presents the current state of Social Security and projects its future 75 years into the future. One of the biggest issues raised in the report is the dire state of the Old-Age and Survivors Insurance (OASI) trust fund reserves, which risks Social Security solvency.

Retirement Trust Fund Reserves Forecast To Fall To Zero By 2033

As I wrote in my Social Security in 2024 – It’s Not All Bad News post, the OASI trust fund’s future is dim. OASI is the fund that pays benefits to retired workers and their survivors. Millions of beneficiaries use their monthly benefits not as travel-the-world funds but as a way to pay for essentials including housing, food, and clothing. The report projects that the other Social Security trust fund, Disability Insurance (DI), will have sufficient income and reserves to cover costs over the 75-year horizon. However, the OASI trust fund is not in the same situation.

OASI Fund DepletedOASI Benefits After Depletion
Separate Trust Funds203379%
Combined Trust Funds203583%

Within 10 years, monthly retirement benefits could decrease 21%

The 2024 Social Security Trustees Report lays out two possible outcomes for the OASI trust fund should Congress and the President not enact changes to the current system:

  • In 2033, the OASI fund will deplete all reserves and will no longer be able to pay scheduled benefits at 100%. The report estimates that beneficiaries will receive 79% of scheduled benefits from 2033 onward
  • Congress and the President could enable the DI fund reserves to cover OASI shortfalls. In that case, the combined OASDI fund reserves would last two additional years until 2035 before depletion. After that point, the report estimates beneficiaries would receive 83% of scheduled benefits

Today’s Youth Did Not Cause The Problem But Are On The Hook

Tucked into Appendix F of the 270-page Trustees Report is an interesting data nugget about the cause and impacts of the Social Security solvency issue. The Appendix titled, Infinite Horizon Projections, looks at the total amount of unfunded obligations. Unfunded obligations is a fancy term meaning the amount of program benefits and costs that exceed program income, aka Social Security debt. Unlike the core report, the infinite horizon projections are not limited to 75 years.

Over an infinite timeline, the present value of unfunded obligations is estimated at $62.8 TRILLION ($62,800,000,000,000). That amount is $40.2 trillion more than the $22.6 trillion in unfunded obligations over a 75-year projection period. That is a lot of debt.

Of the $62.8 trillion in unfunded obligations, $49.8 trillion comes from past and current participants. “Past” participants are people no longer alive and “current” participants are people 15 years old and older as of 2024. Only $13 trillion of the unfunded obligations come from future participants. Therefore, even though today’s youth account for only 21% of unfunded obligations, they will shoulder the burden of paying the debts of those who came before them.

Addressing The Problem – Now vs. Later

As I write this post the year is 2024. This means nine years before the OASI trust fund reserves are depleted. The Trustees Report provides Congress and the President with four scenarios to solve (or not solve) the Social Security solvency issue:

  • Scenario A: Do nothing. Let the OASI trust fund reserves run dry and let monthly benefits drop to 79% in 2033 and beyond
  • Scenario B: Enact changes allowing the use of DI fund reserves to cover OASI shortfalls. That buys them two additional years to solve the larger issue. However, it also means that both funds’ reserves run out in 2035 and both sets of monthly benefits drop to 83% from 2035 onward
  • Scenario C: Pass changes to the system in 2024 to help ensure that the fund remains solvent through the 75-year projection period
  • Scenario D: Wait until 2033 when the OASI trust fund reserves are almost depleted and then make changes to rebuild the reserves and keep the fund solvent through 2098

Just as the 2024 Trustees Report provided forecasts for Scenarios A and B as shown in the table above, it also gave guidance to Congress regarding the changes that would need to be made to the system both now (Scenario C) and at he last moment (Scenario D) to keep retirement and disability benefits at their scheduled levels.

Solving Social Security Solvency – Now (Scenario C)

Procrastination has consequences. Solving the solvency problem with the OASI Trust Fund reserves now will require sacrifices from workers and/or beneficiaries to maintain monthly retirement benefits at 100% of their scheduled amounts.

The report details four options that, if implemented in 2024, would provide OASI solvency over the 75-year projection period:

Graphic showing four options for solving the Social Security solvency issue now. The first box shows a 3.33% Social Security tax increase for workers. The second box shows a 20.8% decrease in benefits for all beneficiaries, both current and future. The third box shows a 24.8% decrease in benefits only for future beneficiaries. The fourth box shows that there could be a combination of an increase in the tax rate and reduced benefits
Four painful but necessary options to solve Social Security solvency in 2024
  • Increase the Social Security tax rate – Each worker paying into Social Security (“covered worker”) pays 12.4% of their wage income to the program. Permanently increasing the rate by 3.33% to 15.73% would provide enough additional income to counteract current deficits
  • Decrease Benefits for All Beneficiaries – If tax hikes are not agreeable, another option is to decrease monthly benefits received by all beneficiaries. This includes people currently receiving benefits and future recipients. Decreasing monthly benefits by 20.8% to 79.2% of scheduled benefits would reduce program costs enough so that existing income covers costs and maintains sufficient reserves
  • Decrease Benefits only for Future Beneficiaries – Perhaps tax hikes and taking benefits away from people already receiving them is not palatable. In that case, they could choose to reduce scheduled benefits for all people who become eligible for benefits in 2024 or later. The report forecasts that decreasing monthly benefits by 24.8% to 75.2% would solve the issue
  • Combination of Measures – Congress and the President could choose to implement a combination of a tax hike and a reduction of benefits. In this case, the combined tax hike and scheduled benefit reduction would each be less than implementing the options on their own

Solving Social Security Solvency – Later (Scenario D)

Of course, Congress and the President can continue to kick the can down the road. As I mentioned in my Social Security in 2024 – It’s Not All Bad News post, the 2024 Trustees Report delayed its forecast of when the hypothetical combined OASDI trust fund reserves would run out by one year, from 2034 to 2035. However, that only delays the inevitable; it does not prevent eventual depletion of the trust fund reserves.

Should the government not enact any changes to the existing program until the OASI and DI combined reserves are depleted in 2035, higher tax rates and/or more drastic cuts in benefits will be necessary than the ones described in the previous section.

The Trustees Report provides three scenarios that, if implemented in 2035, would solve solvency through 2098 for both OASI and DI funds:

Graphic showing three options for solving the Social Security solvency issue in 2035. The first box shows a 4.02% Social Security tax increase for workers. The second box shows a 24.6% decrease in benefits for all beneficiaries, both current and future. The third box shows that there could be a combination of an increase in the tax rate and reduced benefits
The cost of fixing Social Security solvency is much higher by 2035
  • Steeper Social Security tax rate increase – Delaying changes until 2035 would mean that the increase to the Social Security tax rate for workers would need to increase by 4.02% to 16.42%. This is a 0.69% higher tax rate than the tax rate required to solve the issue now
  • Decrease Benefits for All Beneficiaries – If tax hikes are not agreeable, another option is to decrease monthly benefits received by all beneficiaries. This includes people currently receiving benefits and future recipients. Decreasing monthly benefits by 24.6% to 75.4% of scheduled benefits would reduce program costs enough so that existing income covers costs and maintains sufficient reserves
  • Combination of Measures – As above, combining a tax rate increase with reduced benefits would solve the issue

There Are Options But Is There Courage?

The differences between options in 2024 and 2035 illustrate what makes this a difficult social and political conversation. Middle-aged workers may look at the options and favor keeping the status quo for now followed by increasing the tax rate in 2035. In their case, they will have completed most of their working careers by 2035, and may have already started retirement planning based on 100% of their scheduled benefits.

On the other hand, younger workers may desire to solve the problem now through reduced benefits for current and future beneficiaries. This would keep their current tax rate the same and, since they are young, they have more time than older workers to plan for a reduction in their benefits.

Getting an entire population to come together, put personal advantages aside, and reach a concensus on the best approach for all people is complex. However, the situation has reached a point where starting those difficult conversations is required.

Do I think that Congress and the President will implement one of the above options in 2024? No. Being only months from a general election, a change of this magnitude will not happen.

Thankfully, some candidates have finally started speaking publicly that changes to the program are necessary. Combining that with the urgency of the Social Security solvency situation gives a glimpse of hope that addressing the problem will happen sooner rather than later.

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