Social Security Financing–When You’re in a Hole, Stop Digging

In
this website, we encourage retired households to periodically
(generally annually) compare the present value of their assets with the
present value of their spending liabilities to determine a snapshot
Funded Status. We also promote monitoring the household Funded Status
over time to see whether adjustments in assets or spending liabilities
may be necessary or appropriate to keep spending in retirement on track
and consistent with spending goals.As discussed many times in
this website, this is the same process that is used by actuaries to
measure and monitor funding progress for many other financial systems,
including defined benefit pension plans and Social Security. If a
system’s Funded Status (Assets/Liabilities) is significantly in excess
of 100% and exhibits a pattern of increasing over time, it may be
reasonable to decrease system assets and/or increase system liabilities
to avoid over-funding. On the other hand, if a system’s Funded Status is
less than 100% and has exhibited a pattern of decreasing over time,
actions should be taken to bring the system’s Funded Status back up to
at least 100% to ensure long-term system sustainability. Social
Security’s current Funded Status is less than 100% and has exhibited a
generally decreasing pattern since the system was last amended in 1983
to restore its 100% Funded Status. As discussed most recently in our post of July 27, 2024,
we expect that Social Security’s Funded Status will worsen each year in
the future even if assumed experience is actually realized because
unrecognized deficits projected after the end of the 75-year projection
period will continue to be slowly recognized each year. Table IV
B6 of the 2024 OASDI Trustees Report provides us with the data to
calculate the System’s Funded Status (expressed both as
Assets/Liabilities and long-range actuarial deficit as a percentage of
taxable payroll (Assets – Liabilities)/PV Future Payrolls).Social Security’s Actuarial Balance Sheet as of January 1, 2024 (in Billions)Assets LiabilitiesTrust Fund Balance$2,788PV Benefits and Expenses$116,701PV Future Payroll Taxes$84,494PV Ending Target Fund$1,232PV Future Taxation of Benefits Income$6,800Balancing Item (unfunded liability)$(23,850)Total Assets$94,082Total Liabilities$94.082Amounts don’t add to totals due to rounding. PV future payroll taxes includes $1 billion in transfers from General Revenues. The
present value of future taxable payrolls as of January 1, 2024 (in
billions) was $681,799, so the January 1, 2004 long-range actuarial
deficit measure of the system’s funded status was -3.50%
(($23,850)/$681,799). Measured as the ratio of assets to liabilities, it
was 79.8% ($94,082 / $117,933).Under either long-range funded
status measure, it is safe to say that Social Security’s long-range
funding is in a hole. Yet despite its current underfunded status and the
expectation for funded status worsening in the future, there have been
proposals for possibly reducing Social Security’s revenue sources. For
example, former President Trump recently proposed elimination of the
current taxation of Social Security benefits and possibly elimination of
taxation (including FICA taxation?) on overtime pay, and both
presidential candidates have suggested eliminating taxes (including FICA
taxation?) on tip income. Enacting proposals that reduce current Social
Security income without offsetting actions to increase income or reduce
benefits would only make the current funding imbalance worse. For
example, eliminating the present value of future expected income from
taxation of benefits would increase the current long-range actuarial
deficit from 3.5% of taxable payroll to about 4.5% and reduce the
system’s current funded status from 79.8% to 74.0%. Many people
think that Social Security’s funding problem is about 10 years into the
future when trust fund assets are expected to be fully depleted. This is
very short-term thinking. It is analogous to a retired household with
an asset source that is expected to last only 10 years but whose Funded
Status is only 80%. Such a household is in a financial hole and needs to
take action in the very near future to increase assets or decrease
spending. Just because Social Security has a trust fund that can be used
to pay full benefits for the next 10 years does not mean its funding
problem is 10 years away and can be ignored. Social Security’s
funding problems should be addressed soon through some combination of
actions that increase assets and/or decrease benefit liabilities. To
take actions now that simply reduce assets is just making the financial
hole deeper.