Social Security: Restructure, Not Eliminate

Do you assume that Social Security will “be there for you” because you paid into it over your working life?  Would you rather be somewhat prepared or totally surprised if that didn’t come to pass once you retire?

Here are key observations about Social Security that will help you better understand the program and prepare for your future. Because I am receiving Social Security retirement benefits, this was very personal for me. Being a professional financial analyst, I examined the Trustees’ annual reports, pulled out key statistics, and assembled snapshots of its trends and issues.

Hard Fact #1: Social Security Is a Pay-As-You-Go Program

Pay-as-you-go means that current year benefits are paid solely out of current year income. This is perhaps the detail least appreciated by the public, so many of whom hold the assumption that they will receive expected benefits because they have paid into the program for decades. Those OASDI employment taxes sure looked and smelled like an insurance premium. And it is also called an insurance program. BUT! There is no contract, enforceable in our courts, between any individual Social Security recipient and the U.S. government. It is only a program established by law.

OASDI is the acronym for the program’s official title on the Trustees’ reports — “the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds”. Drop the “Federal” and you have Old-Age…Survivors…Disability Insurance. OASDI.

Hard Fact #2: It Has Protection from Congressional Raids

Social Security and its sister Disability program are the ultimate “sequester”. The legislation that created these insurance programs established boundaries. The 1935 Social Security Act limits income for annual benefit payments to three sources. First is OASDI taxes paid by employed workers that year. Second is income the Trust Fund assets earned that year. And third is drawing on the Trust Fund assets themselves if the first two sources aren’t sufficient. Any excess of income after payment of benefits in a single year is put into the Social Security Trust Fund and invested in U.S. Treasury securities. The “General Fund” (the U.S. government’s operating budget, in other words ordinary annual spending) cannot use Social Security income. Conversely, Social Security receives no income from the General Fund.

Hard Fact #3: The Sheer Numbers of Baby Boomers Will Deplete the Trust Funds

The sheer numbers of Baby Boomers has been and remains the #1 issue facing the program’s funding in the future. Servicemen returned from WWII and, having seen so much death and destruction, set about establishing homes, households, and families. They and their spouses increased the birthrate from 1946 until 1964, the accepted final year of the Baby Boomer generation. The rate was about 20 births per 1,000 women at the end of the war and rose rapidly to about 25. The birthrate steadily declined below 20 after the Baby Boomers were born to about 12 births per 1,000 women in recent years. Over time, more Baby Boomers receiving Social Security benefits will have fewer workers in the economy earning income on which OASDI taxes are charged. That means that immigrants are the only other source of workers to produce future Social Security income contributions. Immigration has been challenged by politics and is now severely challenged by a global pandemic. The pandemic’s shock to employment is also a blow to Social Security program income.

Here is a table showing the Baby Boomer birthrate bubble through 2020. The sources are the United Nations and the U.S. Department of Health and Human Services.


For those who like a more visual presentation, here is a chart illustrating the birthrate bubble.


The Social Security trustees use rather optimistic assumptions about future birthrates in the modeling. (They are required by law to model out 75 years.) These assumptions are the remarkably easy to find details about the program available in each year’s trustees report. Here is a link to the 2021 report. Look at Table V.A1. — Fertility and Mortality Assumptions, Calendar Years 1940-2095 on page 90 (the report page).

Hard Fact #4: The Pandemic Hurled a Double Whammy at the Trust Funds

The 2020 trustees report noted the potential pandemic impact, but it was too soon to measure. The 2021 report had more data and began to reveal its initial impact. Reading the report’s summary is a good start for those who want to be better informed.

The issue remains that Social Security is going to run out of funds to pay full benefits within the lifetimes of many retirees and others who will be retiring within the next decade. The trustees reports have been noting that for decades. It is no surprise.

I would suggest, however, that it will run out of funds to pay full benefits somewhat faster than those holding political offices would have us believe. That is due to how immigration has been used in the modeling. The modelers began to be more serious about the immigration assumption as they approached the year 2010, when the first Baby Boomers started to retire and income was less than cost (before interest income). (Income is now less than cost even with interest income on trust fund assets invested in U.S. treasury bonds.)

The trustees really upped the assumption about the number of immigrants entering the country when they were about to raid the Social Security surplus to fund Disability, which faced shortfalls. (See my earlier post on that Congressional budget event in 2015. )

Immigration plummeted in the pandemic, not helped by our national battles over immigration. The following table shows the forecast for immigration from the prior year’s report compared to the actual number in the history shown in the 2021 report. You can also see how the modelers started to actually pay attention to immigration as an assumption — moving beyond 900. The table in the righthand side shows the assumptions for the future from 2020 to 2070 in recent years’ models. All are quite a bit higher than our recent experience.


The implication of the shortfall in the numbers is that there will be fewer humans in the workforce than predicted, meaning fewer will be earning income and paying OASDI taxes into the program.

The following table reveals the trends in various key Social Security and OASDI statistics. The first columns show the report year and its associated fiscal year. The next three columns show the estimated trust fund asset depletion dates for the individual Social Security and Disability programs and the combined programs. The next four columns show notable events. Then four columns summarize OASDI income, cost, the change in trust fund assets, and the amount of trust fund assets at that year’s end, from the 1990 report to the 2021 report. The last three columns show the average immigration assumption used in each year’s 75-year forecast.



The Hardest Fact

The Trustees have been very explicit in their recent required annual reports to Congress. In fact, the law establishing the OASDI program required Congress to act if the programs couldn’t meet certain solvency standards within ten years. Given that Social Security is the big Third Rail in politics (try touching it and you’re out of office) (both parties!), it’s no wonder that the trustees try to kick that can down the road.

Here is the uncomfortable, unpleasant truth in the 2021 report.

“[T]he ratio of reserves to annual cost is projected to decline from 253 percent at the beginning of 2021 to 85 percent at the beginning of 2030. Because this ratio falls below 100 percent by the beginning of the 10th projection year, the combined OASI and DI Trust Funds fail the Trustees’ test of short-range financial adequacy. Considered separately, the OASI and DI Trust Funds also fail this test. For last year’s report, the Trustees projected that combined reserves would be 248 percent of annual cost at the beginning of 2021 and 94 percent at the beginning of 2030.” (page 3)

The report provides its official warning to Congress of the failure and recommends Congressional action. Then it delivers the blow, which has been building for decades, but ignored by all of us.

“To illustrate the magnitude of the 75-year actuarial deficit, consider that for the combined OASI and DI Trust Funds to remain fully solvent throughout the 75-year projection period: (1) revenue would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 3.36 percentage points to 15.76 percent; (2) scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of about 21 percent applied to all current and future beneficiaries, or about 25 percent if the reductions were applied only to those who become initially eligible for benefits in 2021 or later: or (3) some combination of these approaches would have to be adopted.” (page 5)

Ugly. The cold, hard reality. Presidential Commission after Presidential Commission has alerted the nation and Congress of this looming truth. Both parties, the citizenry, and even the President who appointed the commission chose to ignore the recommendations. What the 2021 report continues to say was true back when the commissions delivered recommendations. Time got shorter and shorter.

“If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Significantly larger changes would be necessary if action is deferred…” (page 5)

What an individual can do is to plan accordingly. Expect to receive less than 80% of promised benefits in the 2030s, for example. That’s the gap forecasted in recent reports after the depletion date. Build savings now to manage that gap. Time was on our side decades ago and was squandered. There is a little time left for individuals to at least prepare for the impact.

Where to Find Trustworthy Information

An essential, publicly-available overview of the program is the annual Trustees report to Congress, typically published in the summer. The 2021 report was the 81st. We might not trust our government much these days, but they provide an amazing amount of detail in a consistent fashion.

Each Trustees Report presents a short summary at the front of the report. It shows the income and expenditures of each of the programs, major statistics, and an estimate of when each is expected to run out of sufficient funds to pay full promised benefits.

The report published last summer (in 2021) covered financial year 2020, which began on October 1, 2019, and ended on September 30, 2020. (In my tables and charts, the columns should be clearly labeled “report year” or “financial year”.)

Here is the link to all the Social Security Trustees Reports.