The 2022 Trustees Report for the Social Security program confirms that the program faces a long-term financing shortfall equivalent to 1% of GDP and consequently federal legislators will need to take steps to fix the problem before 2035 to prevent Americans from experiencing a “precipitous” cut in benefits.
Those findings are not surprising, according to Alicia H. Munnell, director of the Center for Retirement Research at Boston College, who authored a June article about the report. In her piece, Munnell said the Trustees Report included “no real news about the overall future of the Social Security program” because the forecast remains consistent. According to the Trustees Report, the 75-year deficit in the program declined slightly – 3.42 percent of taxable payrolls in 2022 compared to 3.54 percent in 2021 – and the year for the projected depletion of trust fund assets moved back from 2034 to 2035, but the bottom line remains the same, Munnell said.
“Social Security’s shortfall over the next 75 years has been evident for the last three decades. It should be addressed sooner rather than later in order to share the burden more equitably across cohorts, restore confidence in the nation’s major retirement program, and give people time to adjust to needed changes,” said Munnell, who is also the Peter F. Drucker Professor of Management Sciences at Boston College.
She said that “the changes required to fix the system are well within the bounds of fluctuations in spending on other programs in the past.”
Munnell noted that the Social Security program’s 75-year deficits in the last two Trustees Reports have been the largest since 1983 due to an increase in costs driven by demographics that can be traced to the drop in the total fertility rate after the baby boom (between 1946 and 1964).
The retirement of baby boomers combined with a slow-growing labor force due to the decline in fertility has reduced the ratio of workers to retirees from about 3:1 to 2:1. Long-time increases in life expectancies have also led to growing costs.
If nothing is done and the trust fund is allowed to be depleted, Munnell said payroll tax revenues will cover 80% of currently legislated benefits at first and decline from there. If the program was to rely only on current tax revenues, she said, the benefits relative to pre-retirement earnings for the average age-65 worker would eventually drop from 38% to 27%, the lowest rate since the 1950s.
Meanwhile, Munnell said that the number of new people entering the disability rolls per thousand insured workers has been dropping since 2010, reversing three decades of steady growth. Among the chief reasons for the changing trajectory, Munnell said the percentage of applicants approved for Social Security’s Disability Insurance program dropped from 57% in 2009 to 49% in 2019.
“The sharp decline does raise the question whether all those needing help are getting it,” Munnell said.
The Trustees Report this year incorporated the decline and updated the long-range disability incidence assumption rate from 5.0 to 4.8 per thousand insured. That change had a major impact on projections for the long-term financial health of the Disability Insurance program, Munnell said.
“The depletion rate for the DI trust fund moved from 2057 in last year’s report to being able to pay the full benefits for the entire 75-year projection period,” Munnell said.
Among other highlights of the Trustees Report, Munnell said it serves to rebut a frequent contention that retirees are especially hurt by inflation because they live on fixed incomes.
While Social Security does serve as the major source of retirement income for most Americans, Munnell said the program provides an automatic cost-of-living adjustment (COLA) to reflect increases in the Consumer Price Index. The adjustment for 2022 was 5.9%, one of the highest since the 1980s, and Munnell said it could be 8% in 2023.
“Retirees do not live on fixed incomes; their monthly benefits go up when prices rise,” Munnell said. “Yes, the need for a solid number means that COLA lags a bit as inflation starts, but the COLA will exceed the inflation rate as price increases slow.” Ultimately, Munnell said, “retirees are protected against the ravages of inflation.”