This is a follow-up to our post of October 14, 2024. In this follow-up post, we will estimate Social Security’s January 1, 2025 Funded Status based on 2024 valuation results and once again point out that now is probably a good time for our congressional representatives to be looking at ways to increase system revenues and/or decrease system benefits to improve the system’s Funded Status rather than looking at ways to increase system benefits and/or decrease system revenues.
In our post of October 14. 2024, we reformatted the data from Table IV B6 of the 2024 OASDI Trustees Report to develop an actuarial balance sheet and Funded Status similar to the actuarial balance sheet and funded status determination we recommend as a funding metric for retired households, as follows:
Social Security’s Actuarial Balance Sheet as of January 1, 2024 (in Billions)
Assets | Liabilities | ||
Trust Fund Balance | $2,788 | PV Benefits and Expenses | $116,701 |
PV Future Payroll Taxes | $84,494 | PV Ending Target Fund | $1,232 |
PV Future Taxation of Benefits Income | $6,800 | Balancing Item (unfunded liability) | $(23,850) |
Total Assets | $94,082 | Total Liabilities | $94.082 |
Funded Status (Assets/Liabilities) |
|
| 79.8% |
Amounts don’t add to totals due to rounding. The PV of future payroll taxes includes $1 billion in transfers from General Revenues.
We estimated Social Security’s Funded Status as of January 1, 2025 using the same 2024 data and adjusting the 2024 liabilities for our estimate of:
- The expected actuarial loss resulting from the change in the 75-year projection period from 2024 to 2025, and
- The increase in system liabilities resulting from passage of the Social Security Fairness Act
Based on estimates by the Congressional Budget Office (CBO), we estimated the present value of the increase in system liabilities associated with passage of the Social Security Fairness Act to be about $700 billion. Based on historical actuarial losses resulting from passage of time, we estimated the actuarial loss for 2024 (assuming no other gains or losses or changes in assumptions) to be about $350 billion, for a total increase in system liabilities calculated in 2024 of about $1,050 billion.
Increasing the system liabilities in the actuarial balance sheet above by $1,050 billion would drop the system’s funded status from 79.8% to 79.1%. It would also increase the system’s unfunded liability by $1,050 billion, which would drop the system’s 75-year long-range actuarial balance from -3.50% of taxable payroll to -3.65% of payroll. And it is important to remember that both of these metrics are expected to deteriorate each year even if all actuarial assumptions are realized (and neither assumptions nor benefits are changed) solely due to use of a different 75-year projection period in the calculations (referred to in prior posts as the “valuation date creep”).
Ok, based on these estimated 2025 metrics, we can see that Social Security is in a financing hole. This is not big news. To get a different perspective of the size of the hole, however, let’s think in terms of how much the current tax rate (combined employer/employee) would have to be increased to bring the system’s funded status measured over the next 75 years back up to 100%. If enacted on January 1, 2025 with no other changes, the increase would have to be 3.65% of taxable payroll for a total combined employer/employee tax rate of 16.05% (a 29% increase).
But wait, President Trump and others have advocated ceasing future taxation of Social Security benefits. What would enactment of such a provision do the above estimate 2025 funded status metrics and the tax increase that would be required to be enacted to bring the system’s funded status back to 100%? By subtracting the present value of future taxation revenue from the assets in the exhibit above, we developed an estimated 2025 Funded Status of 73.4% or a 75-year long-term actuarial balance of -4.65%. If enacted on January 1, 2025 with no other changes, the increase in the payroll tax rate to achieve a 100% Funded Status would have to be 4.65% of taxable payroll for a total combined employer/employee tax rate of 17.05% of taxable payroll (almost a 38% increase).
But wait again, would enactment of these higher tax rates (16.05% with no change in current taxation of benefits or 17.05% with no future taxation of benefits) fix the system for 75 years? Not likely. It would increase the system’s measure funded status to 100% based on the Trustees assumptions for the next 75 years, but these metrics are just snapshot measures that can change from year to year based on actual experience, assumption changes and enacted system changes. And as noted above, the 75-year projection period ignores higher benefit liabilities after the end of the 75-year projection period that are expected to generate actuarial losses each year under the current benefit and tax structure. In addition, the assumptions for the next 75 years may be optimistic. CBO, for example, believes that they are, and in their 75-year projection for 2024, they developed a 75-year long-range deficit of 4.3% of taxable payroll vs. the Trustees deficit of 3.5% of taxable payroll.
As noted in our post of February 3, 2025, even if system changes satisfy the requirements for “sustainable solvency” (a more stringent funding status metric designed to address the 75-year valuation date creep inherent in the long-range actuarial balance metric), would this fix the system for any specific period of time (i.e., 75 years or longer)? Once again, the answer unfortunately is also no because the sustainable solvency metric is also a snapshot metric (similar to the Funded Status metric we recommend for retired households) whose accuracy is dependent on the accuracy of the next 75 years of Trustees assumptions. Without enactment of some type of algorithm (guardrails) to maintain a 100% Funded Status over time, there will be no true fix for the system.
Summary
From a long-term perspective, Social Security funding is in a pretty big hole. Yes. It also has a short-term cash flow problem that also should be addressed, but now is clearly not the time to enact system provisions that either increase benefits or decrease revenues without regard to consideration of the long-term impact on system solvency.
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