The Social Security trust fund’s 75-year deficit has been forecasted to increase from 2.78% to 3.21% of taxable payroll, due to a repeal of tax on high-premium health plans, a lower assumed total fertility rate resulting in a higher share of retirees in the workforce, lower inflation and a lower interest rate. The trust fund is also still expected to be fully depleted by the year 2035. This is according to the 2020 Old Age, Survivors, and Disability Insurance tax (OASDI) Trustee’s Report issued by the Social Security Administration.
The report, which was compiled based on data cultivated prior to the outbreak of the COVID-19 coronavirus pandemic, represents that both Social Security and Medicare faced major financial shortfalls well before the effects of the coronavirus, and the full economic impact of the current state of affairs cannot be accurately predicted at this point in time, according to the Trustees.
“Both programs will experience cost growth substantially in excess GDP growth during through the mid-2030s due to rapid population aging,” the Trustees summary reads. “Medicare also sees its share of GDP grow through the late 2070s due to increases in the volume and intensity of services provided.”
A major driver of the increasing costs of the Social Security program are driven by demographics, according to a research brief analyzing the Trustees Report authored by Alicia H. Munnell at the Boston College Center for Retirement Research.
“The increase in costs is driven […] specifically by the drop in the total fertility rate after the baby-boom period,” Munnell writes. “A woman of childbearing age in 1964 could expect to have 3.2 children; by 1974 that expectation had dropped to 1.8. The combined effects of the retirement of baby boomers (those born between 1946 and 1964) and a slow-growing labor force due to the decline in fertility reduce the ratio of workers to retirees from about 3:1 to 2:1 and raise costs commensurately.”
Additionally, long-term increases in life expectancies will also cause costs to rise after the worker-to-retiree ratio stabilizes, Munnell writes. That increasing gap between income and cost rates has resulted in the Social Security system facing a 75-year deficit.
While this is somewhat mitigated by the presence of the Social Security trust fund, a shift from an annual surplus to a deficit has resulted in the Social Security program tapping the interest on trust fund assets to cover benefits sooner than was expected, Munnell writes.
“And, in 2021, taxes and interest are expected to fall short of annual benefit payments, which requires the government to begin drawing down trust fund assets to meet benefit commitments,” she writes. “The trust fund is then projected to be depleted in 2035.”
While the effect of the pandemic was not incorporated into this specific report, the problems facing Social Security are not insurmountable, and COVID-19 is not likely to have a major impact on the long-term health of the Social Security program, Munnell says.
“The changes required to fix the system are well within the bounds of fluctuations in spending on other programs in the past,” she says. “And while the effects of the COVID-19 pandemic are not incorporated in the Report, even such a dramatic event is unlikely to fundamentally alter the long-term financial status of the program.”