Social Security's Cash Reserve Depletion Estimate: Take It With a Grain of Salt
Since 1985, lawmakers on Capitol Hill have known that Social Security was in trouble. For each of the past 33 years, the Social Security Board of Trustees has examined the short-term (10-year) and long-term (75-year) outlook for America's most important social program and found that the long-term outlook comes up short in the revenue column.
More specifically, at some point in the next 75 years, each of the previous 33 reports has found that Social Security's asset reserves -- i.e., its aggregate net cash surpluses since its inception -- would be completely depleted. Currently sporting almost $2.9 trillion in asset reserves as of the end of 2018, the trustees report projects that this excess capital will run out by 2034.
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Social Security isn't going bankrupt, but unpleasant changes may await
Why would this excess cash disappear? The answer has to do with a number of ongoing demographic changes that are going to adversely affect the program. Examples include the ongoing retirement of baby boomers, which'll weigh down the worker-to-beneficiary ratio, increasing longevity over many decades, growing income inequality that's allowing the rich to pocket a larger monthly benefit for an extended period of time, and low fertility rates over the past decade, which may also weigh on the worker-to-beneficiary ratio.
The thing to understand about the projected exhaustion of Social Security's nearly $2.9 trillion in asset reserves is that it's not the end of the world for the program. If this extra capital disappears, Social Security will lose one of its three sources of revenue -- interest income -- but will keep its other two more important recurring sources of revenue: the 12.4% payroll tax on earned income, and the taxation of benefits. Put another way, Social Security will still have plenty of cash flowing in for disbursement to eligible beneficiaries.
But saying goodbye to this asset reserve safety net isn't without consequences. According to the trustees' report, an across-the-board benefit reduction of up to 21% may be necessary by 2034 to sustain payouts through 2092 without the need for any further cuts. Not exactly an optimal forecast, with more than three out of five retired workers reliant on Social Security right now for at least half of their income.
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These estimates are often subject to revision
But there's something you have to understand about Social Security's supposed "Judgment Day" in 2034: It's just the best estimate the trustees can provide right now.
When examining Social Security's long-term outlook, the trustees use various stochastic modeling and take into account low-, intermediate-, and high-cost estimates. The midpoint of the trustees' modeling suggests that Social Security's net cash outflows will lead to an exhaustion of its almost $2.9 trillion in cash by 2034. But the stochastic model suggests a 95% confidence in this money running out between 2030 and 2043. That means it could very well be just 11 years until this cash is gone, or perhaps as many as 24 years, although the midpoint of 2034 (i.e., the intermediate-cost model) tends to have the highest confidence.
However, things change, and it's extremely likely that the projected asset reserve depletion date will as well. Since 1985, the projected year of asset reserve depletion has changed 22 times, albeit just once over the past six years. As with most estimations, they become more accurate as the expected event nears.
There are a lot of factors that could cause the trustees to rethink their estimates, including fiscal policy out of Washington. The passage of the Tax Cuts and Jobs Act (TCJA), as well as President Trump's calls for a tighter immigration policy, may lead to short- and intermediate-term impacts on Social Security's revenue collection. Some of these could be positive, with the TCJA potentially providing a very short-term growth spurt in the U.S. economy and helping to push Social Security to yet another net cash surplus in 2018. But these impacts may be negative, too, such as a net decrease in immigration to the United States. Social Security relies on the legal migration of younger workers who'll contribute to payroll tax revenue for decades.
Demographic changes could also lead to a readjustment in the projected asset reserve depletion date. For instance, fertility rates in the U.S. are at a 40-year low. If this dip in birth rates, which has been ongoing for almost a decade, continues for, say, another five to 10 years, it may mean a higher probability that the high-cost model will play out. That would potentially speed up the exhaustion of the program's asset reserves.
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One more thing...
And there's one more thing you shouldn't completely rule out: Congress could come to the rescue. While even I've opined that Americans can't count on Congress to save their retirement given how partisan and divided politics have become on Capitol Hill, it's not out of the question that a resolution is reached before Social Security's excess capital is bled dry.
Back in 1983, Social Security was facing this exact scenario. Had the Reagan administration not passed the bipartisan Amendments of 1983, the program would have run out of its excess cash later that year. What this demonstrates is that while lawmakers love kicking the can down the road, they'll often act on Social Security when they no longer have any other choice.
By this definition, it could still be well over a decade before lawmakers get truly serious about resolving Social Security's cash crunch. But it still offers hopes that a common-ground solution could be reached that emphasizes the core proposals of both parties.
Though a benefit reduction looks likely now by 2034, you should ultimately take that estimation with a grain a salt.
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