Social Security trust funds may outlast official projections: Wharton
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Social Security’s trust funds may get a little more attention than expected new long range projections by Penn Wharton Budget Modelshared exclusively with CNBC.
trust fund Social Security, which helps pay for retirement benefits — Old-Age and Survivors Insurance, or OASI — could run out in February 2033, according to the Penn Wharton Budget Model at the University of Pennsylvania, which provides nonpartisan estimates and analysis of the impact of public policy.
Against this, Social Security trustee report On June 9, projects were announced that the fund could last until the fourth quarter of 2032.
If disability insurance is combined with the trust fund, the projected depletion date could be pushed back to February 2035, according to PWBM. The Social Security trustees report projects a depletion date for the combined funds in the third quarter of 2034.
Social Security uses revenue from payroll taxes to pay benefits. When benefit payments exceed payroll tax revenue, the program relies on trust funds to help cover the shortfall.
The end dates assume no action by lawmakers to support the program.
If trust funds run out, Social Security will not go bankrupt because the payroll taxes that fund benefits will continue to come in.
However, payments to beneficiaries may be reduced. Once the combined trust funds are exhausted, PWBM projects that 86% of planned aid will be disbursable, falling to 60% by 2100. Meanwhile, Social Security’s trustees’ project is to have 83% paid out when total funds are exhausted, dropping to 65% by 2100.
PWBM’s independent analysis of the program’s solvency had previously predicted earlier exhaustion dates than Social Security’s board of trustees. The gap has now “closed and reversed slightly,” according to the report.
‘Pretty big’ changes needed to fix Social Security
But Kent Smetters, a Wharton professor and PWBM faculty director, said PWBM’s forecast still shows a need for Social Security reform soon.
“We’re still talking about something “There’s a pretty big increase that would be required in terms of taxes or benefit cuts going forward, and if we don’t act soon, that number is going to go up even more,” Smetters said.
According to the Social Security Institution, a positive actuarial balance represents a financing surplus, while a negative actuarial balance is called an actuarial deficit. board of trustees report. PWBM projects an actuarial shortfall of 4.65% of taxable payroll, versus the 4.42% projected in this year’s Social Security trustees’ report.
According to the report, to close this gap, the current 12.4 percent payroll tax rate for both employees and employers would need to be increased by 4.7 percentage points to 17.1 percent. Policymakers could also opt for an equivalent reduction in benefits or a combination of both, the report says.
How do trust fund depletion calculations differ?
PWBM produces its Social Security forecast using a microsimulation model that takes a different approach than the program’s board of trustees. Social Security’s trustees start with assumptions about aggregates like fertility rates and average wage growth and use that information to create long-range forecasts.
PWBM instead starts with individual-level data such as earnings and family structures. Its new report states that categories such as fertility, life expectancy and wage growth are outputs rather than assumptions.
There are four major changes this year in Social Security’s trustees’ report, Karen Glenn, the agency’s chief actuary, said at a June 10 meeting. virtual briefing A nonpartisan organization hosted by the Committee for a Responsible Federal Budget, this organization focuses on educating the public on fiscal policy issues.
These were:
- Glenn said the total fertility rate dropped from 1.90 children per woman to 1.75 children per woman.
- According to Glenn, migration forecasts have also been updated to reflect current historical data and future expectations. “We assume that future net migration levels to the illegally existing population will be lower than we predicted last year,” he said.
- Labor productivity and average real earnings, also known as real GDP per hour worked, are projected to grow faster in the near term.
- He said President Donald Trump’s “big, beautiful bill” made changes to income tax rates and standard deductions, resulting in Social Security funds receiving less revenue through income taxes on benefits.
PWBM’s expectations differ in two of these areas. The report predicts that the long-term fertility rate will be approximately 1.6 births per woman. The report also does not specifically explain the effects of the “big is beautiful” law.
The “big beautiful bill” legislation does not directly eliminate taxes on Social Security benefits; financial impactAccording to Smetters. While there is still some revenue loss due to the law, there are also short-term economic gains, resulting in changes “within the standard error of the estimates,” Smetters said.
Certain factors may affect Social Security’s future estimates. For example, if GLP-1 drugs are proven to extend life expectancy, that would negatively impact the program’s long-term deficit as people live longer, Smetters said.
Besides PWBM research Smetters said that although artificial intelligence has shown that it will increase productivity and GDP in the long term, there are also risks to the economy, especially if the artificial intelligence bubble bursts, and this could have negative macro effects.
Correction: This story has been revised to reflect that increasing the payroll tax rate from 12.4% to 17.1% represents an increase of 4.7 percentage points. In the previous version, the magnitude of the increase was stated incorrectly.
