As the OASDI Trust Fund exhaust date nears, clients may be worried that their benefits will be cut by 20% in 2034. This comes from the 2023 Trustees Report which expressed the system’s shortfall in a way that could be interpreted as an impending benefit cut.
The trustees’ exact words were: “Under the intermediate assumptions, the projected hypothetical combined OASI and DI Trust Fund asset reserves become depleted and unable to pay scheduled benefits in full on a timely basis in 2034. At the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 80 percent of scheduled benefits.”
This is one of many ways the trustees express the system’s projected shortfall. They also express it this way:
- To illustrate the magnitude of the 75-year actuarial deficit, consider that for the combined OASI and DI Trust Funds to remain fully solvent throughout the 75-year projection period ending in 2097: (1) revenue would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 3.44 percentage points to 15.84 percent beginning in January 2023; (2) scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of 21.3 percent applied to all current and future beneficiaries effective in January 2023, or 25.4 percent if the reductions were applied only to those who become initially eligible for benefits in 2023 or later; or (3) some combination of these approaches would have to be adopted.
- If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Significantly larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2034. For example, maintaining 75-year solvency through 2097 with changes that begin in 2034 would require: (1) an increase in revenue by an amount equivalent to a permanent 4.15 percentage point payroll tax rate increase to 16.55 percent starting in 2034, (2) a reduction in scheduled benefits by an amount equivalent to a permanent 25.2 percent reduction in all benefits starting in 2034, or (3) some combination of these approaches.
The trustees are not suggesting that benefits WILL be cut or that taxes WILL be raised. They are just expressing the accounting in a simplified way to make it clear that to bring the system into actuarial balance, taxes will need to be raised or benefits will need to be cut—and by how much.
They go on to say, “Lawmakers have a broad continuum of policy options that would close or reduce Social Security's long-term financing shortfall. Estimates for many such policy options are available at ssa.gov/OACT/solvency/provisions/.”
If you go over to that page you’ll see many different ways the system can be reformed and how the changes would impact solvency. Here is a PDF summary. Changes fall into several categories: Cost-of-living adjustment, benefit levels (PIA formula), retirement age, family members, payroll taxes, trust fund investment in equities, and taxation of benefits. Each reform measure, such as “Reduce factors so that initial benefits grow by inflation rather than by the SSA average wage index.” (as an example) carries its own number representing the percent of payroll that would be affected by the change, as well as how far the measure goes in restoring full solvency, in this case 2.87 (compared to the current -3.61) and 80%, respectively. In other words, changing the indexing factors and bend points used to calculate the PIA for 62-year-olds so these inflation adjustments rise with prices instead of wages (which tend to rise more rapidly) would go a long way—80%—toward restoring solvency.
In real life, based on what we’ve seen proposed in Congress, Social Security reform will not comprise one single measure. Rather, a number of measures will likely be instituted, some to raise revenues and some to reduce benefits. Whenever a lawmaker drafts a proposal, they submit it to the Chief Actuary who crunches all the numbers and determines how the combined measures would impact the system. You can see a list of recent proposals here. Pay special attention to John Larson’s Social Security 2100 Act, which has been modified several times (but has not won over Alicia Munnell in its current form). This bill is still in committee and has not come up for a vote.
There is also a bipartisan study group kicking around different ideas, including the big idea to create an investment fund separate from Social Security, which would invest in equities and presumably be able to meet the shortfall when it comes.
The point is that Social Security reform is far more complex than clients realize. The trustees may have expressed the shortfall as an across-the-board benefit cut in 2033 or 2034 (depending on whether you’re considering just the OAS Fund or the combined OASDI Fund), but that doesn’t mean it’s going to happen. In fact, I can safely say it will NOT happen.
But for clients who are worried about their benefits being cut or Social Security otherwise turning out to be less than they expect, you can turn it into a productive conversation by asking how they would like to manage this risk: options might include working longer, saving more, or changing their investment strategy. The one option that should be off the table is claiming benefits early. Some clients may use the “impending benefit cut” (which is not going to happen) as an excuse to claim early, but all they’ll be left with is a permanently reduced benefit and the lost opportunity to maximize benefits over their lifetime.