A new report from the Cato Institute suggests that Social Security may be in worse shape than we thought, if birth rates turn out to be lower than the Trustees project. Because of Social Security’s pay-as-you-go system, where benefits for current retirees are funded by payroll taxes paid by current workers, birth rates have a crucial impact on the system’s finances. How those birth rates are estimated can greatly affect the projected deficit.
According to the Cato Institute, the Social Security Trustees assume that the current fertility rate of about 1.6 children per woman will increase to 1.9 by the early 2040s and remain there through 2100. This is far more optimistic than projections by the Census Bureau and the Congressional Budget Office, which see birth rates declining through the rest of this century.
The 75-year shortfall as projected by the Trustees is $27 trillion in present value terms. However, with more realistic total fertility rate assumptions, Social Security’s 75-year shortfall increases to $30 trillion (with Census projections) or $31 trillion (with CBO projections) in present value terms. (Cato did not give a revised trust fund exhaust date, probably because the impact of these long-term fertility projections would be minimal over the next eight years.)
The piece ended with a plea to Congress to be wary of relying on demographic assumptions that are substantially more optimistic than those used by other government forecasters and that they should reconvene the Technical Panel on Assumptions and Methods to better assess the fertility rates likely to occur in the US in the future.
Read the Cato blog here.