Actuaries delve into Social Security trust fund deficit

A stronger economy is good news for the Social Security program.

Increases in the projected level of labor productivity and employment, combined with a continued drop in worker disability led to the projected date of the Social Security trust fund’s depletion being moved back a bit – from April 2033 to November 2033. If the trust fund is depleted, retirees would still receive approximately 76% of their benefits.

What’s behind the most recent annual report of the Social Security Old-Age, Survivors and Disability Insurance Program’s trustees to Congress? Two actuaries from the Social Security Administration provided some answers during a recent webinar by the American Academy of Actuaries.

The trustees have presented a report to Congress every year since 1941. This year’s report contains three main differences, said Stephen Goss, Social Security Administration chief actuary.

1. Economic: The U.S. economy experienced unanticipated strength through 2023, with increased levels of labor productivity and employment rates.

One driver of this economic difference, Goss said, is that gross domestic product is expected to be 3% higher in 2024 than it was in 2023, and projected to continue increasing through 2033.

2. Disability: The assumed ultimate disabled worker incidence rate was lowered from 4.8 to 4.5 per 1,000, as applications for and awards of disability benefits have continued at low levels.

Applications for disability benefits remain near historically low levels, said Karen Glenn, Social Security Administration deputy chief actuary. Applications reached a high of 1.9 million in 2010 but were at 1.2 million in 2023. The decline in disability applications is mainly due to the changing nature of work, she said. People are better able to hold a job because of accommodations by employers, increased telework and less physical labor required by the jobs that are out there.

3. Demographic: Fertility rates are dropping. The assumed ultimate total fertility rate was lowered from a projected 2.0 children per woman in 2056 to 1.9 children per woman in 2040, given continued low level of the TFR in recent years.

Discussion of the Social Security trust fund’s potential depletion is nothing new.  Amendments to the Social Security Act in 1983 reduced early retirement benefits and raised the retirement age for future retirees. The 1983 reforms were expected to ensure the program’s solvency through 2060.

So why are we looking at a potential trust fund reserve depletion before that date?

Goss said it’s not because of increasing longevity rates. Projected life expectancy at age 65 was extremely accurate in the 1983 Social Security trustees report, he said, as were the projected increase in the size of the over-65 population and falling birth rates.

The main issue, he said, is a drop in the ratio of taxable earnings to all OASDI covered earnings. Between 1983 and 2000, the average annual earnings for the top 6% of earners rose 62% more than the consumer price index, but rose only 17% more for the other 94% of earners. This decline was not predicted in 1983.

The share of workers with wages exceeding the OASDI taxable maximum remained fairly stable at around 6%. The share of wages in excess of the OASDI taxable maximum has generally risen since 1983 and it stood at 17.9% in 2021, the latest year in which data is available.

Several steps can be taken to eliminate the Social Security long-term actuarial deficit, Goss said. Congress must act to either add revenue and or lower cost for OASDI.

Possible ways to lower costs include:

• Lower benefits for retirees who are not disabled and/or increase the normal retirement age. Long-career low earners can be exempt from these changes.
• Pay lower benefits to high earners.
• Reduce the Social Security primary insurance amount for high earners above some level, noting that higher earners generally live longer. This could be combined with increasing the PIA below some level, subject to work year requirements.
• Lower benefits mainly for the oldest beneficiaries.
• Reduce the cost of living adjustment by using the chain-weighted CPI for all urban consumers.

Possible ways to increase revenue include:

• Raise the 12.4% OASDI payroll tax rate.
• Raise the tax on the highest earners. Increase the taxable maximum amount. Impose some degree of tax on all earnings above the maximum.
• Tax employer group health insurance premiums.
• Tax investment income.

Congress has historically waited to take action until reserve depletion is imminent, Goss said. Given the uncertainties, it’s difficult to lower benefits or raise taxes until necessary. Enacting Social Security reforms sooner allows more options, more gradual phase in, and more advance notice, he said.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on X @INNsusan.

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].