How Bad is Social Security’s Financial Condition?

This post is a follow-up to our post of October 14, 2024
entitled, “Social Security Financing—When You’re in a Hole, Stop
Digging.” In this post, we will look at the retirement plan of a
hypothetical couple with approximately the same underfunded status as
Social Security. We employ this analogy to try to give readers a better
sense of the system’s current financial predicament and the need for
sooner, rather than later, action to address it.Background—Social Security Financing FactsBased on information provided in the 2024 OASDI Trustees report under the Trustees’ Intermediate Assumptions,Social
Security’s Funded Status (Assets/Liabilities) as of January 1, 2024 was
79.8% (long-term actuarial deficit of 3.5% of taxable payroll).The
OASDI Trust Fund assets as of January 1, 2024 were about 2.4% of the
present value of total System liabilities for the next 75 years,The
present value of system revenue (from payroll taxes and taxation of
benefits) was about 77.4% of the present value of total system
liabilities, andThe trust fund was expected to be depleted in 2035.While
not addressed in the Trustees’ report, we estimate that OASDI’s Funded
Status will be approximately 75% in 2034 (long-term actuarial deficit of
about 4% of taxable payroll), even if all assumptions about the future
between now and then are realized (and not changed). This expected
deterioration in the system’s Funded Status is due to recognition of
previously unrecognized deficits in years subsequent to the moving
75-year projection period used to measure the system’s assets and
liabilities. These expected “actuarial losses” result from what the
actuaries at the Social Security Administration refer to as the annual
change in “valuation period” and are highlighted in Actuarial Note
2024.8, but not projected (or discussed) in the annual Trustees’
Reports.Hypothetical Couple’s Funded StatusLet’s
compare Social Security’s funded status with the funded status of Bill
and Susie, who are recent retirees. Bill is age 67 with a Social
Security benefit of $23,000 per annum and Susie is age 65 with a Social
Security benefit of $19,200 per annum. They only have accumulated
savings of $50,000 invested in non-risky assets and no other significant
assets like a home. They estimate their annual essential spending at
$54,000 per year in real dollars with no other spending anticipated. Based on default assumptions for the Actuarial Financial Planner for Retired Couples,Their Funded Status is 79.8% (PV Assets of $1,000,539 / PV Spending Liabilities of $1,254,427)Their portfolio assets of $50,000 represents about 4% of the present value of their spending liabilityThe
present value of their Social Security benefits (their only source of
income other than earnings on their accumulated savings) is about 76% of
the present value of their spending liability, andIf they
spend exactly their spending budget of $54,000 in today’s dollars each
year and all of the AFP default assumptions are realized, their
accumulated savings is expected to be depleted in about five years.While
Bill and Susie’s financial situation is not exactly the same as Social
Security’s, it is comparable, and not particularly rosy. To balance
their assets and spending liabilities over their planned lifetimes, they
will either have to increase their sources of income, decrease their
planned spending or some combination of the two. Bill and Susie
did not save enough during their working years to adequately fund their
desired level of spending throughout their entire planned retirement.
They have several options at this time to address their financial
situation: increase their assets, decrease their liabilities or some
combination of the two. Their options also involve the timing for when
to take the chosen actions (now, when their accumulated savings run out
or some time in between).Options–increasing assetsThey can:Go back to work in order to accumulate sufficient assetsRent out one or more of the rooms in their apartment or their garage spaceRely on their children, the government or rich relatives to support their spending needsInvest their assets more aggressively and/or buy lottery ticketsOptions–decreasing liabilitiesThey can:Reduce their planned spendingUse more optimistic planning assumptionsThe
prudent course of action would be for Bill and Susie to take corrective
action in the near future. However, instead of taking action now to
address their inadequate funding situation, they decide to wait until
their portfolio assets have been exhausted.As noted above, Bill
and Susie’s financial situation is not exactly the same as Social
Security’s. However, there are some similarities. The system has been
out of long-range actuarial balance for over 30 years– long ago
indicating the need to reduce system benefits or increase system
revenues. Therefore, it can be argued that, like Bill and Susie, many of
today’s system beneficiaries failed to sufficiently fund their full
retirement benefits. Also, rather than having their benefits reduced,
many current beneficiaries are content to have their children, the
government, more wealthy taxpayers or just someone else support
continuation of their current benefits.SummaryThe
example of Bill and Susie’s financial situation is intended to serve as
an analogy to explain the current Social Security funding problem. The
prudent course of action for Social Security is to address the system’s
financial situation sooner rather than later. The American Academy of
Actuaries released an excellent Issue Brief entitled “Reforming Social Security Sooner Rather than Later.”
It makes several good points why it doesn’t make sense to wait until
the system’s trust fund is exhausted to take remedial actions. Readers
may also find my Advisor Perspectives article, Social Security’s Deterioration and Implications for Future Reform to be of interest.How
bad is Social Security’s financial condition? Despite having sufficient
assets to cover benefits for the next 10 years under Intermediate
Assumptions, the system’s long-term funded status is poor and is
expected to worsen over the next 10 years without corrective action. In
addition, there have been recent proposals to increase system benefits
or decrease system revenue–actions which will only make the system’s
long-range financial condition even worse.