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Social Security was created in 1935 and is the largest single program in the federal budget. Between its two components — Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) — Social Security pays over one trillion dollars in benefits to over 65 million Americans. Social Security is funded by tax revenues from two streams: payroll tax (96 percent) and income taxes on Social Security benefits.
When Social Security became law, the average life expectancy was 64, and age 65 was the earliest that Americans could receive their benefits. Today the average American lives until the age of 79. According to the Social Security Administration, "In 1940, the life expectancy of a 65-year-old was almost 14 years; today it is just over 20 years. By 2035, the number of Americans 65 and older will increase from approximately 56 million today to over 78 million. There are currently 2.8 workers for each Social Security beneficiary. By 2035, there will be 2.3 covered workers for each beneficiary." Read the document here.
Because of the aging of the population and the increase in economy-wide health costs, social security is increasingly strained. The Congressional Budget Office (CBO) projects "the number of Social Security beneficiaries will rise from 64 million in 2019 to 97 million in 2049 and spending for the program will increase from 4.9 percent of GDP to 6.2 percent over that period. Those projections reflect the assumption that Social Security will continue to pay benefits as scheduled under current law, regardless of the status of the program’s trust funds." Read the report here.
The U.S. Government Accountability Office (GAO) puts it even more bluntly: "Put simply, Social Security programs now cost more than the government collects to fund them. Costs began to exceed revenues for the Disability Insurance (DI) trust fund in 2005 and for the Old-Age and Survivors Insurance (OASI) trust fund in 2010. And the gap between costs and revenue for these programs is projected to continue, with the trust funds becoming depleted in the next few decades. Once this happens, the programs won’t have sufficient income to pay full scheduled benefits."
The 2020 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds found that "OASDI cost is projected to exceed total income starting in 2021, and the dollar level of the hypothetical combined trust fund reserves declines until reserves become depleted in 2035. Considered separately, the OASI Trust Fund reserves become depleted in 2034 and the DI Trust Fund reserves become depleted in 2065." Read the report here.
That sounds bad enough, but the Penn Wharton Budget Model (PWBM), a nonpartisan, research-based initiative at the Wharton School of the University of Pennsylvania, "projects that Social Security’s financial condition is substantially worse than official Social Security Trustees estimates, which don’t factor in how the future growth of debt reduces future growth of the payroll tax base." Read the report here. Their key points:
The World Bank. "Life Expectancy At Birth, Total (Years)." 4 May 2020
United States. Social Security Administration. "Fact Sheet." 4 May 2020
United States. Congress. "The 2019 Long-Term Budget Outlook." Congressional Budget Office. June 2019
United States. Government Accountability Office. "Social Security Programs." 26 Nov 2018
United States. Social Security Administration. "The 2020 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and
Federal Disability Insurance Trust Funds." 22 Apr 2020
"Social Security's Worsening Financial Condition." Penn Wharton Budget Model. University of Pennsylvania. 8 Aug 2018
“The Moment of Truth.” The National Commission on Fiscal Responsibility and Reform. December 2010
Since the major Social Security reforms were passed in 1983, Social Security Trustees have slowly reduced their projected Social Security trust fund exhaustion date from at least 2058 to 2034. Yet, Trustees’ estimates don’t incorporate how the nation’s growing debt erodes the size of the future tax base.
Using a model that incorporates future macro-economic forces, PWBM projects that the Social Security trust fund depletes in 2032. More importantly, we project much larger future annual cash-flow shortfalls. Relative to the payroll tax base, we project a cash-flow shortfall in 2032 that is 36 percent larger than the Trustees’ estimate for that year. By 2048, our projected cash-flow shortfall is 77 percent larger.
If Social Security shortfalls continue to contribute to the federal government’s unified deficits, consistent with no changes in taxes or benefits, we project that the federal debt-to-GDP ratio will exceed 200 percent by 2048, a path that is not sustainable.