The 2026 OASDI Trustees Report is expected to be issued in
the near future. Last year, the 2025
report was released in June. Like we
did last year, we will take a shot at predicting this year’s 75-year actuarial
balance (deficit) before the report is issued.
In February, 2025, we estimated that Social Security’s
long-range actuarial balance as of January 1, 2025 would be -3.65% of present
value of taxable payrolls for the next 75 years (down from -3.50% in 2024), or
a funded status (PV of Assets/PV of Liabilities for the next 75 years) of 79.1%
(down from 79.8% the previous year). Our estimates turned out to be
optimistic. The
long-range actuarial balance as of January 1, 2025 determined by the Trustees
was -3.82% of the present value of taxable payrolls for the next 75 years under
the revised intermediate assumptions, or a funded status of about 78.3%.
Using different (some would argue more realistic), the
Congressional Budget Office (CBO) calculated a 75-year long-range actuarial
balance (deficit) of -4.9% of taxable payroll. Under the CBO’s more conservative
assumptions, the system’s funded status (still measured over a 75-year period)
would be about 72%, meaning that under the CBO assumptions the system has about
$.72 in assets for each $1 in liabilities.
Under generally accepted actuarial practice, a system’s
funded status is expected to remain unchanged from year to year if all
assumptions about the future are realized during the year, assumptions are
unchanged and the system’s benefits are unchanged. Unfortunately, this is not the case for the
Social Security system. Because the
projection period is limited to 75-years, deficits of projected outgo over
projected income for periods after 75-years are ignored. This unrealistic assumption results in an
increase in the system’s long-term actuarial deficit due to what Social
Security actuaries refer to as “change in the valuation date.” We call this unrecognized increase “Valuation
Date Creep.” Since 1983, Valuation Date
Creep has been consistently about .05%-.06% of the present value of the
system’s projected taxable payroll measured over the 75-year projection
period. Last year, it was .06 and we
expect it to be the same from 2025 to 2026.
We aren’t going to rant much about the Valuation Date Creep
in this post. You can look at our older
posts about Social Security financing for how we really feel about it. We advocate the use of the Sustainable
Solvency measure as a better measure of the system’s financial status because
it directly addresses the Valuation Date Creep problem and provides a better
measure of the system’s long-range cost.
The current 75-year measure overstates the system’s long-term funded
status and understates its long-term cost. Unfortunately, neither the Social Security
actuaries or the Trustees provide the sustainable solvency measure in their
reports, and they do not project what the system’s long-range actuarial balance
(deficit) is expected to grow to be in the future without legislative action.
Our prediction of the 2026 75-year Long-Range Actuarial
Deficit
Subsequent to release of the 2025 Trustees Report, Congress
passed the One Big Beautiful Bill Act.
In a letter to Senator Ron Wyden, the Chief Actuary of Social Security
estimated that passage of the act would increase the 2025 long-range actuarial
deficit for the system to -3.98%.
We expect the one-year Valuation Date Creep will once again
be -.06%
We also expect changes in assumptions and experience for
2025 to add another -10% to the deficit, about the same as in 2024. This estimate is consistent with bringing SSA
and CBO assumptions more in line with each other.
This brings our estimate for the 2026 75-year long-range
actuarial balance (deficit) to be -4.14%, or a funded status of about 76%.
Short-term cash flow problem
Of course, most people in the U.S. aren’t concerned with the
long-term funding shortfall. They are
mostly concerned about the short-term cash flow problem. Our guess is that the 2026 Trustees Report
will confirm CBOs estimated OASI Trust Fund exhaustion year of 2032.
Conflating the long-term and short-term problems
We have been reading a great deal about Social Security’s
financial problems and solutions for “fixing” the system. Many of the proposals we have read recently
involve future benefit reductions. It is
important to note that while future benefit reductions can help address the
system’s long-term problems, they can do very little if current benefit levels
are preserved for current beneficiaries and those currently eligible for
benefits. If Congress “grandfathers”
benefits for all current beneficiaries and currently eligible workers, the
short-term cash flow problem can only be addressed with significantly higher
system revenues, not benefit reductions.
For example, limiting benefits to $50,000 per year (not indexed with inflation)
will do almost nothing to address the trust fund exhaustion date issue.
OMG, is eliminating taxes on benefits still on the table?
We estimate eliminating taxes on Social Security benefits
will drop the system’s funded status from the flawed SSA (not CBO) 2026 75-year
estimate of 76% to about 71%. In
addition, it would hasten the trust fund exhaustion date. And remember that 71% is an overstated
estimate based on SSA assumptions (not CBO) and the flawed 75-year projection
period problem.
Summary
Social Security’s funded status measured using a flawed
optimistic measure hovers in the 75%-70% range, and is getting worse each year
due to the Valuation Date Creep. As
indicated in our previous post, it may make sense for households to target a
funded status higher than 100% for their finances in retirement as a hedge
against future experience less favorable than assumed. We don’t believe such a hedge is necessary
for the nation’s retirement system, but we do caution that adopting reform that
brings the flawed funded status back to 100% will not necessarily “fix” the
system. For that reason, we advocate
that future reform also includes automatic adjustment mechanisms that keep the
system in long-range actuarial balance over time.
