It’s time, again, for the annual Social Security Trustees’ Report. The headline figures, as always, are the change in the dates at which the various trust funds are projected to be depleted. Combining OASI (Old-Age and Survivors Insurance) and DI (Disability Insurance) together, the depletion date has been extended one year further out, from 2034 to 2035. Taking the two programs separately, the old-age fund’s depletion date remains unchanged at 2034, a mere 15 years from now, but the disability fund’s depletion date was extended from 2032 to 2052. When each of these funds are depleted, they will be able to pay out 77% and 91% of benefits, respectively, out of incoming tax revenues.
What’s going on?
To begin with, why such a dramatic improvement in the status of the disability fund? The Trustees’ summary explains:
The change in the reserve depletion year for DI is largely due to continuing favorable experience for DI applications and benefit awards. Disability applications have been declining steadily since 2010, and the total number of disabled-worker beneficiaries in current payment status has been falling since 2014. Relative to last year’s Trustees Report, disability incidence rates are lower in 2018. They also are assumed to rise more gradually from the current levels to reach ultimate levels at the end of 10 years that are slightly lower.
What’s this mean? In part, the prosperous economy has meant that more people with disabilities are finding employment and are able to stop claiming Social Security disability benefits, or never need to begin doing so in the first place. This means that actual disability recipients are fewer in number than was forecast, and that they have changed the assumptions going forward as a result. That’s great news — if that continues to be true in the long-term.
But there’s another change in the American economy and society that the report has not reflected, and that’s the declining fertility rate, which the report continues to assume will be a level of 2.0 children per woman in the year 2027 and later. While the report acknowledges that the 2018 fertility rate is an estimated 1.74, it nonetheless maintains a 2.0 fertility rate because
the Trustees expect the total fertility rate for future years to remain relatively close to the average level since the end of the baby-boom era (p. 81)
after assuming a recovery period extending to 2027.
Now, I’m not going to second-guess the experts at the Social Security Administration with respect to their selection of economic assumptions such as wage increases or inflation. And likewise, estimates regarding immigration are so impacted by policy decisions as to make it very difficult to forecast in the long-term. I will also observe that future fertility rates will not have an impact on the OASI trust fund depletion because no baby born in the future will be working 15 years from now.
However, the historic lows in American fertility rates appear to be here to stay, or, at least, a part of long-term changes in society that we have no grounds for believing will reverse themselves, and those low rates have a significant impact on the long-term finances of the program. Based on the report’s sensitivity projections, the actuarial balance, that is, the program deficit as a percentage of taxable payroll, worsens considerably if the assumed fertility rate drops from 2.0 to 1.8: from -2.38% to -2.55% for the 50 year projection and from -2.78% to -3.22% in the 75 year projection. In 2093, that is, at the end of the 75 year projection and as the cumulative consequence of the lower fertility rate, the projected deficit moves from -4.11% to -5.63%.
Is this intolerable? Not a big deal in the grand scheme of things? Easily solved by bringing in more immigrants? A win for the environment and habitat preservation for which higher social insurance costs are a small price to pay? Regardless of one’s point of view, it matters. What’s more, the metric of trust fund depletion year focuses our attention so much on a single year in the near future that it appears to be preventing us from seeing the big picture.
Does it matter?
The same arguments are being rehashed year after year. “The fair thing to do is to increase the retirement age because people are living longer.” “No, all we need to do is increase taxes on the wealthy to fix the shortfall.” “No, these aren’t welfare programs; the responsible way to fund middle-class social insurance programs is by having the middle-class pay for them.” But we — the American public at large and our representatives, Republican and Democrat, in Congress — never seem to get past talking at each other to working together to solve the problem.
About this time a year ago, I wrote an article I titled, “The Social Security Trust Fund Is Real – But So What?” in which I hoped to persuade readers that the money in the trust fund is real money, the government has a real obligation to pay back the bonds when the trust fund redeems them, full faith and credit, yadda yadda yadda — and yet, in the end, it just doesn’t matter. Congress may solve the issue of trust fund depletion by increasing taxes to replenish the fund. They might, on the other hand (as I cynically tend to expect to happen), wait until 2034 and then pass a series of stop-gap measures enabling general revenues to supplement FICA tax collection as needed to avoid reductions in benefits.
What matters is the big picture. How much “room” is there for a broad-base or high-income tax hike specifically meant to fund Social Security, relative to so many other competing priorities, from education to parental leave/child care and other benefits for parents, to the anticipated needs of future displaced workers, and medical care for workers and the anticipated growing cost of Medicare/Medicaid/long-term care for the elderly? Promoting a fix without looking beyond the single metric of trust-fund depletion or 75-year solvency will miss the point entirely.
What do you think? Share your opinions at JaneTheActuary.com!