In our post of February 15, 2025, we estimated Social Security’s financial status as of January 1, 2025 using:
- results from the 2024 OASDI Trustees report,
- an estimate from the Congressional Budget Office (CBO) of the effect of passage of the Social Security Fairness Act,
- our estimate of the effect of the annual actuarial loss to the system resulting from the change in the 75-year projection period, and
- no other changes in assumptions, system provisions or methods
Last February, we estimated that Social Security’s long-range actuarial balance as of January 1, 2025 would be -3.65% of present value of taxable payrolls for the next 75 years (down from -3.50% last year), or a Funded Status (PV of Assets/PV of Liabilities for the next 75 years) of 79.1% (down from 79.8% last year). Our estimates turned out to be optimistic.
The OASDI Trustees released the 2025 OASDI Trustees Report today. The long-range actuarial balance as of January 1, 2025 determined by the Trustees was -3.82% of the present value of taxable payrolls for the next 75 years under the revised intermediate assumptions, and based on data from Table IV B6 of this report, we developed 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, 2025 (in Billions)
Assets |
| Liabilities |
|
Trust Fund Balance | $2,721 | PV Benefits and Expenses | $120,203 |
PV Future Payroll Taxes | $85,417 | PV Ending Target Fund | $1,244 |
PV Future Taxation of Benefits Income | $6,936 | ||
Total Assets | $95,074 | Total Liabilities | $121,447 |
Funded Status (Assets/Liabilities) |
|
| 78.3% |
Source: Table IV B6 of the 2025 OASDI Trustees Report. The PV of future payroll taxes includes $1 billion in transfers from General Revenues.
Based on these actual 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 3.82% of taxable payroll for a total combined employer/employee tax rate of 16.22% (a 31% 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 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 develop a revised 2025 Funded Status of 72.6% or a 75-year long-term actuarial balance of -4.83%. 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 4.83% of taxable payroll for a total combined employer/employee tax rate of 17.23% of taxable payroll (almost a 40% increase).
But wait again, would enactment of these higher tax rates (16.22% with no change in current taxation of benefits or 17.23% 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 still be optimistic.
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, and worse than we estimated earlier this year. 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.
