Social Security Trustees Show Program Headed Toward Insolvency

Today, the Social Security and Medicare Trustees released reports on the financial state of the country's largest entitlement programs. The reports show all three major trust funds on the road to insolvency, with the Social Security Disability Insurance (DI) trust fund projected to run out in 2016, the old age trust fund projected to be exhausted in 2034 (2033 if combined with the DI trust fund), and the Medicare Hospital Insurance trust fund projected to become insolvent by 2030 (or 2029 under their alternative scenario). As the reports show, action must be taken soon to keep these programs financially sustainable for future generations.

With regards to Social Security, the program's finances are slightly worse than last year's report. On a combined basis, the Trustees project a 1.02 percent of GDP, or 2.88 percent of taxable payroll shortfall over the next 75 years, slightly higher than 0.98 percent of GDP (2.72 percent of payroll) shortfall seen in last year's report. By the end of the projection window, they project a shortfall of 1.7 percent of GDP and 4.9 percent of taxable payroll.

Failure to close this shortfall would mean that, assuming inter-fund borrowing between the disability and old-age funds, all beneficiaries regardless of age or income would experience a 23 percent benefit cut in 2033. More immediately, though, the exhaustion of the Disability Insurance trust fund in just 2 years (2016) that would result in a 19 percent cut to benefits. Reallocating payroll tax revenue from the old-age trust fund to DI would forestall its insolvency for 17 years, but it would bring the much larger old-age fund a year closer to being insolvent.

Social Security Revenue and Benefits, 1970-2090

Source: Social Security Administration

The 0.16 percent of payroll change in the 75-year shortfall is primarily due to changes in economic assumptions, which increase the gap by 0.1 percentage points. In addition, shifting the 75-year window from 2013-2087 to 2014-2088 -- adding the relatively high deficit 2088 -- adds 0.06 percentage points to the shortfall. Other demographic and technical changes largely cancel out.

Sources of Change in 75-Year Shortfall (Percent of Payroll)

Source: Social Security Administration

The Social Security projections once again show the need to act to reform the program. Every year that passes is another year closer to insolvency even if projections don't change, and the DI trust fund's insolvency is just around the corner. Further, the problem will only get larger the longer we wait as the Trustees note:

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. Much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2033...Some strategies for achieving solvency would not be feasible if delayed until trust fund reserve depletion in 2033...The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them.

For further perspectives on the Trustees report, check out our event "Decoding the 2014 Social Security Trustees Report" which will be held tomorrow beginning at 8:15 AM. We will also publish a longer analysis of the Social Security report later today, and we will break down the Medicare report later in the week.