Social Security Trustees Report 2022: Doomsday Deferred

Transcript of Podcast Episode 183

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, Social Security Trustees Report 2022: Doomsday Deferred?

The Social Security trustees released their annual report on June 2.  The good news is  the situation has improved over last year–somewhat.  Last year’s report, issued in August 2021, indicated  the combined trust funds would run out of money in the year 2034. The new report pushes that back by a year to 2035.

Please note  there are two separate Social Security trust funds, one for retirement benefits and one for disability.  The fund  for retirement benefits is by far the larger of the two.  The combined trust fund balance was about $2.8 trillion at the end of last year.

For years, the disability trust fund was the problem child. But the rate of disability claims has slowed.  According to the report, the amount in the disability trust fund should now be sufficient to cover benefits for the next 75 years.

Meanwhile, the retirement trust fund alone is projected to last until 2034.  Using what’s projected to be available in the disability trust fund would extend this out by another year to 2035.

But, of course, the assumptions are subject to change.  The report estimates a 3.8 percent Cost of Living Adjustment (COLA) for 2023.  But less than a week after the report was issued, Social Security’s Chief Actuary, Steve Goss, estimated that the real number would be more like 8 percent.

By law, the trust funds invest exclusively in non-publicly traded government bonds. The combined trust funds ran a surplus for many years.  But since 2010 annual benefit payments have exceeded the payroll and income tax revenue they collect.  In spite of that, the overall trust balance kept going up slightly every year due the interest earnings inside the funds. But that changed in 2021, when they began dipping into their principal reserves for the first time in decades.

In spite of what some people might believe, just because the funds may run out of money in the future does not mean that Social Security will go broke.  The majority of the money paid out in Social Security benefits comes not from the trust funds but from FICA taxes withheld from workers’ paychecks.  If the current projections hold, starting in 2035 Social Security will pay out approximately 80% of their projected benefits.

This assumes, of course, that Congress does nothing to address this issue between now and then.  And that is what nearly happened last time there was a serious trust fund crisis.  In 1983, it took until the trust funds were almost completely depleted before Congress decided to act.

The 1983 changes, which included tax changes and a gradual increase in Full Retirement Age, were originally projected to keep the program solvent for 75 years.  Based on the current projection, they are going to be about 23 years short of the original goal.

But the lesson of 1983 still rings true today.  The good news is that the current report puts off “doomsday” by another year.  The bad news is that this is just another reason to delay any serious effort to address the issues.  And the longer they wait, the more difficult it becomes to solve the problem.

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