For more than eight decades, the Social Security program has played a critical role in providing a financial foundation for our nation’s retired workers. According to the Budget Priorities and Policy Centers, it pushes more than 15 million retirees out of poverty on their own each year.
But it is also a program that faces serious financial obstacles for years to come. For each of the past 35 years, the report of the Social Security Board of Trustees has warned that not enough long-term income (defined as the 75 years after the publication of a report) would be raised to cover all projected disbursements , including cost of living adjustments. While this does not mean bankruptcy or insolvency, it does imply that cuts in Social Security benefits may be necessary to maintain the solvency of the program.
How big would these benefit cuts be? Although the answer tends to change every time the US economic outlook is changed or broad fiscal measures are introduced, the 2020 report calls for a possible overall reduction of 24% in payments to retired and surviving workers. That’s no negligible.
The big question is, when could this happen? Let’s take a closer look at the timeline of events that could lead to a significant reduction in Social Security benefits.
2021: the first year of net cash outflows
You may be surprised to learn that the first in a series of events is expected to occur next year.
The Trustees’ latest report forecast that Social Security would generate a net cash surplus of $ 4.4 billion in 2020, but see $ 21.1 billion in net cash outflows in 2021. The last time the program suffered a cash outflow net (that is, more expenses than revenue collected) was in 1982, a year before the Reagan administration approved the last major bipartisan reform of the Social Security program.
Although the program entered the decade with almost $ 2.9 trillion in asset reserves (net cash surplus accumulated since inception), the projection is that almost $ 1.1 trillion will be gone by the end of 2029, leaving $ 1.82 trillion. This net cash outflow is expected to worsen each year in this decade.
2034: OASI depletes its asset reserves (if treated separately)
Social Security actually consists of two trusts:
- The Old Age and Survivor Insurance Trust (OASI), which provides payments to retired workers and survivors of deceased workers; and
- The Disability Insurance (DI) trust, which provides payments to workers with long-term disabilities.
When Trustees examine the long-term prospects for Social Security, they hypothetically combine the finances of these two trusts into one (known as OASDI). But if these two trusts were examined individually, OASI is in greater danger of depleting its asset reserves sooner. According to the latest report, OASI is expected to deplete its asset reserves by 2034, at which time benefit cuts would be necessary to maintain solvency.
2065: DI depletes its asset reserves (if treated separately)
In comparison, the DI Trust has a considerably longer track before problems. The 2020 Trustees report believes that the DI Trust will not deplete its asset reserves until 2065, which is actually 13 years later than was projected in the 2019 Trustees report.
According to the most recent report, this change is due to a historically low rate of disability insurance claims and benefit awards, as well as a reduction in the long-term disability incidence rate model.
2035: the most likely year when benefit cuts will be needed
Now for the bottom line of when Social Security benefit cuts are likely to occur. Since the revenue collection can be diverted to OASI or DI through congressional action, as needed, the OASDI combination is expected to fully exhaust its nearly $ 2.9 trillion in asset reserves by 2035.
Despite the DI Trust’s 45-year track before it runs out of net cash surpluses, the DI Trust only represents $ 95.2 billion of the $ 2.897 billion currently in asset reserves. Therefore, the DI Trust would only add approximately one year of buffer to the OASI funding gap.
If Congress were to take action by increasing additional income and / or reducing disbursements, this 24% reduction for retired workers and survivors would be expected to take place in approximately 15 years.
But wait, there is more
On the other hand, the Trustees’ report is just the opinion of an educated group about what could happen to the most successful social program in the United States.
One thing the Trustees’ report does not take into account is the impact of the 2019 coronavirus disease pandemic (COVID-19). Since the main source of Social Security income is the 12.4% payroll tax on earned income, and the unemployment rate has soared from a 50-year low of 3.5% to a maximum of almost nine decades from 13.3% in a couple of months, there is little question that COVID-19 has damaged the program’s short-term revenue-raising ability.
Worse yet, the coronavirus pandemic is unlikely to allow the American economy to recover with the flip of a switch. This means lasting negatives for Social Security.
In a recently released analysis using the Penn Wharton Budget Model (PWBM) from the University of Pennsylvania, depletion of the asset pool projected by Social Security has advanced from two to four years, depending on the pace of the economic recovery . If the United States’ economic recovery is rapid and V-shaped, Social Security will deplete its asset reserves by 2034 instead of 2036, as the PWBM had previously anticipated. But if it’s a slower U-shaped recovery, Social Security could consume nearly $ 2.9 trillion by 2032, four years earlier than originally expected.
Please note that these estimates take into account a big number of dynamic variables, including birth and death rates, net immigration, fiscal and monetary policy, the inflation rate, and economic growth forecasts, to name a few. They are not perfect or carved in stone.
But a consistent message the American public has seen from these forecasts is that the need for possible cuts in Social Security benefits is closing and lawmakers are running out of time to implement an effective solution.