Planning on Social Security, Part II

The Social Security trustees recently released their 2022 OASDI Trustees Report detailing the financial status of the program. The news this year was actually a little better than last year’s. Based on the trustees’ intermediate assumptions,

• The trust fund depletion date (TFD) in this year’s report is 2035, compared with 2034 in last year’s report,
• The program’s 75-year actuarial deficit is only 3.42% of taxable payroll compared with 3.54% last year, and
• The default option if Congress does not enact program changes prior to TFD is an across the board 20% decrease in program benefits in 2035 compared with a 21% decrease in program benefits in 2034.

In this post, we will once again raise the question that very few of our readers (or many baby boomers for that matter) care to actually think about--How should one plan for possible future decreases in Social Security benefits in light of the program’s financial situation? 

This post is an abbreviated update of our post of October 14, 2021. We will once again start out by reviewing some background information found in the updated Actuarial Note 2022.8. This actuarial note provides a summary of the actuarial results for the program and an analysis of the program’s gains and losses by significant source since the 1983 Amendments last placed the system in actuarial balance.

Actuarial Note 2022.8—Changes in 75-Year Actuarial Balance Since 1983

The Office of the Actuary of the Social Security Administration updates this actuarial note every year as part of the annual actuarial valuation process. Here is a link to the 2022 version of the note and Table 1 from the note is shown below. You can read it by clicking on the link below.

Table 1 of AN 2022.8

This Table tells us several important things about System financing since the 1983 Amendments: 

• The 75-year actuarial balance between projected System income and outgo has decreased fairly consistently every year since 1983 when the System last achieved 75-year actuarial balance.
• The 2022 75-year actuarial balance is now -3.42% of taxable payroll,
• Since 1983, relatively negligible cumulative gains have resulted from legislative changes, demographic data and assumption changes and programmatic data and method changes, while slightly larger cumulative losses have resulted from economic data and assumption changes and disability data and assumptions changes. 
• By far the largest cumulative loss since 1983 (66% of the total actuarial deficit) is attributable to the annual change in the 75-year valuation period used in the actuarial balance calculations (which we call the “valuation date creep”). These losses result because each year’s 75- year projection period ignores significant deficits projected after the end of the projection period. 
• Absent legislative changes in the system, the current 75-year Actuarial Balance of -3.42% is expected, because of this valuation date creep, to decrease every year in the near future even if all actuarial assumptions about the future are realized. It is expected reach over 4% of taxable payroll in the next ten years (best guess by just extending the recent annual decreases shown in the Valuation Period column of Table 1).
• For at least the past 30 years, the OASDI Trustees Reports have been sending a consistent message that the system is out of actuarial balance and either taxes should be increased, benefits should be reduced or some combination of these changes should be enacted to put it back into actuarial balance.

Despite the consistent message about insufficient program funding delivered in prior annual Trustees Reports, no action has been taken by Congress to place the program back into actuarial balance. Arguably, much of the reason for this inaction is because

1. There were still assets remaining in the OASDI Trust Funds,
2. For many years those assets were increasing,
3. There was no imminent risk of not paying full benefits, and
4. No one was particularly excited about having their benefits reduced or their taxes increased.

Based on the information in this table, however, one could certainly make a reasonably case that since baby boomers (and the silent generation) failed to pay sufficient taxes to support their full benefits over at least the past 30 years (as evidenced by the declining actuarial balance), perhaps their full benefits should now be reduced to some degree if and when the System is reformed. In fact, just this case was made by Andrew Biggs in his Forbes article, “Social Security Benefits Aren’t Earned if You Didn’t Pay for Them.” 

Default Option vs. Congressional Action Prior to TFD

As noted above, if no Congressional action is taken prior to TFD to reform Social Security, benefits will be automatically reduced across the board by something like 20% in 2035. Based on the intermediate assumptions, this 20% decrease is expected to grow to 26% by 2096. Taking no action is essentially the default option for Social Security reform against which other reform options (involving some type of legislation) may be measured. 

Of course, most baby boomers and silent generation members would not be terribly happy seeing their Social Security benefits reduced by 20% or more. Most retirees would prefer that Social Security reform leave their benefits unchanged (or perhaps even be increased). In order to keep all baby boomers and silent generation members whole, however, reform measures that restore actuarial balance (over 75-years or longer) would require even larger than 20% combined benefit reduction/tax increases be imposed on non-retired Generation X, Y, Z and Alpha workers. One might imagine, however, that some or all of these workers, may prefer to accept the default 20% reduction in future benefits rather than, for example, incurring a 33% increase in future taxes (from 12.4% of taxable payroll to 16.4% of taxable payroll) or incurring some other combination of future benefit reductions and tax increases that produces a comparable financial effect.

Conclusion

We remain unconvinced that reforming Social Security will necessarily be an easy task. Those who claim it will be easy usually have a proposal in mind to increase the taxes and/or reduce the benefits of someone other than themselves. We see fairly difficult intergenerational and general fairness issues involved in reforming the program this time around.

There is nothing in the Social Security law that says that benefits cannot be reduced for beneficiaries in pay status. We do understand, however, that it may not be politically feasible to do so. The point of this post is not to suggest specific program changes, but rather to raise the possibility that future program reform (or the default option) could involve some level of benefit cuts for beneficiaries in pay status. Therefore, it may make sense to plan in advance for this eventuality. And while it would certainly be nice for retirement planning purposes to know exactly what actions Congress will take down the road, we suspect that we may not receive such guidance very soon.

As we said in our October 14, 2021 post, “unless your means are very modest or you are very old, we believe it is more prudent for you to plan on some level of future benefit reduction or increase in taxes instead of simply assuming that the entire burden of achieving Social Security’s future financial balance will be borne by someone else.”