Retirement

Social Security’s 75-year deficit isn’t surprising – Retirement Research Center

Much of this is due to changes in the program’s 75-year horizon.

The 2024 Social Security Trustees report shows a 75-year deficit of 3.50 percent of taxable payrolls, up from .02 percent in 1983. 1983 was entirely predictable and the remainder was largely due to an unexpected development outside the scope of the program.

First, the predictable part of the story. The reasons for the increase in Social Security’s 75-year deficit over the past 41 years are shown in Table 1. Each time the 75-year period moves forward one year — for example, from 1983-2057 to 1984-2058 — it picks up a year with a large negative balance. The cumulative effect of adding these negative balances over the past 41 years is to increase the 75-year deficit to 2.38 percent of taxable payrolls. That is, more than two-thirds of the 41-year change in deficits is due to just moving the assessment period forward.

Table Showing Causes of Change in Social Security Actuarial Deficits, 1983-2024

The fact that such a large increase in the deficit is due to a mechanical problem – not a change in cost or revenue – should give us confidence in the accuracy and stability of the actuaries’ estimates. Moreover, most of the remaining one-third of the increase in the deficit is due to large-scale unanticipated growth—that is, an increase in income inequality, which has led to a large decline in the ratio of taxable income to covered income. .

Allow me to explain. Only earnings below $168,600 in Social Security contributions and benefit bases in 2024 are subject to the program’s payroll tax and count toward benefits. The portion of total income below this limit is the taxable proportion. As inequality has increased, the percentage of income subject to taxation has fallen from about 90 percent in 1983 to 82 percent today (see Figure 2).

Line graph showing the taxable ratio of total income for Social Security, 1983-2040

A reduction in the taxable proportion increases social security spending for two reasons. To understand the effects of both channels, suppose Average Wage growth is constant for workers as a whole, but that growth shifts to the upper end of the income distribution.

The first channel is through the development of the Social Security benefit formula – meaning that Social Security provides more benefits relative to earnings for low earners than for high earners. Consequently, higher than the taxable cap implies an increase in the share of covered income. relatively Increasing low incomes for workers of modest means. This slower income growth means less tax revenue for Social Security, but—because of the progressive benefit formula—future benefits are not reduced by an equal amount.

Another channel through which rising income inequality erodes Social Security finances is through the Average Wage Index (AWI). AWI is based on all covered earnings, below and above the taxable maximum. An increase in AWI that results from an increase in the maximum taxable income does not give rise to any additional tax revenue. But such increases increase benefits because the AWI is used to increase workers’ prior earnings when calculating their benefit levels.

While actuaries in 1983 knew that Social Security costs would increase over time because of population aging and that the 75-year deficit would increase as the assessment period advanced, they I had not planned the hike. But now that too is included in the estimates.


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