In this website, we encourage retired households to periodically (generally annually) compare the present value of their assets with the present value of their spending liabilities to determine a snapshot Funded Status. We also promote monitoring the household Funded Status over time to see whether adjustments in assets or spending liabilities may be necessary or appropriate to keep spending in retirement on track and consistent with spending goals.
As discussed many times in this website, this is the same process that is used by actuaries to measure and monitor funding progress for many other financial systems, including defined benefit pension plans and Social Security. If a system’s Funded Status (Assets/Liabilities) is significantly in excess of 100% and exhibits a pattern of increasing over time, it may be reasonable to decrease system assets and/or increase system liabilities to avoid over-funding. On the other hand, if a system’s Funded Status is less than 100% and has exhibited a pattern of decreasing over time, actions should be taken to bring the system’s Funded Status back up to at least 100% to ensure long-term system sustainability.
Social Security’s current Funded Status is less than 100% and has exhibited a generally decreasing pattern since the system was last amended in 1983 to restore its 100% Funded Status. As discussed most recently in our post of July 27, 2024, we expect that Social Security’s Funded Status will worsen each year in the future even if assumed experience is actually realized because unrecognized deficits projected after the end of the 75-year projection period will continue to be slowly recognized each year.
Table IV B6 of the 2024 OASDI Trustees Report provides us with the data to calculate the System’s Funded Status (expressed both as Assets/Liabilities and long-range actuarial deficit as a percentage of taxable payroll (Assets – Liabilities)/PV Future Payrolls).
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 |
Amounts don’t add to totals due to rounding. PV future payroll taxes includes $1 billion in transfers from General Revenues.
The present value of future taxable payrolls as of January 1, 2024 (in billions) was $681,799, so the January 1, 2004 long-range actuarial deficit measure of the system’s funded status was -3.50% (($23,850)/$681,799). Measured as the ratio of assets to liabilities, it was 79.8% ($94,082 / $117,933).
Under either long-range funded status measure, it is safe to say that Social Security’s long-range funding is in a hole. Yet despite its current underfunded status and the expectation for funded status worsening in the future, there have been proposals for possibly reducing Social Security’s revenue sources. For example, former President Trump recently proposed elimination of the current taxation of Social Security benefits and possibly elimination of taxation (including FICA taxation?) on overtime pay, and both presidential candidates have suggested eliminating taxes (including FICA taxation?) on tip income. Enacting proposals that reduce current Social Security income without offsetting actions to increase income or reduce benefits would only make the current funding imbalance worse. For example, eliminating the present value of future expected income from taxation of benefits would increase the current long-range actuarial deficit from 3.5% of taxable payroll to about 4.5% and reduce the system’s current funded status from 79.8% to 74.0%.
Many people think that Social Security’s funding problem is about 10 years into the future when trust fund assets are expected to be fully depleted. This is very short-term thinking. It is analogous to a retired household with an asset source that is expected to last only 10 years but whose Funded Status is only 80%. Such a household is in a financial hole and needs to take action in the very near future to increase assets or decrease spending. Just because Social Security has a trust fund that can be used to pay full benefits for the next 10 years does not mean its funding problem is 10 years away and can be ignored.
Social Security’s funding problems should be addressed soon through some combination of actions that increase assets and/or decrease benefit liabilities. To take actions now that simply reduce assets is just making the financial hole deeper.
