The Social Security Administration (SSA) just issued its annual report and projects a fiscal cliff in 2034. Let’s discuss what’s happening, what’s being done about it and how you might be affected.
The SSA administers two large trust funds. The first is the Old Age and Survivors Insurance (OASI) program, which makes monthly income available to insured workers and their families at retirement. The second is the Disability Insurance (DI) program, which supports disabled workers and their survivors. The two programs are jointly referred to as OASDI, and their combined trust funds have asset reserves of $2,908 billion.
On August 31, the Board of Trustees for the OASDI trust funds released their 2021 Annual Report. The report confirms the scope of the activities covered by the SSA trusts in 2020:
The trustees report also states that the total cost of Social Security is projected to be higher than total income in 2021. Cost over-runs are projected to continue indefinitely, eroding the SSA trust funds until they are depleted in 2034. Absent ongoing reserve funding, program benefits and scheduled expenditures must collapse to stay in line with program income. The resulting fiscal cliff in 2034 is shown in this chart:
The 2021 Annual Report is based on assumptions for fertility, mortality, productivity, inflation, tax receipts, etc. Taken together, the short-range outlook supports the sustainability of Social Security, but at great cost:
After 2034, Social Security is projected to operate in the red. The chart below shows the magnitude of the 75-year actuarial deficit that the fund trustees project.
There are solutions for the long-term actuarial deficit in the trustee’s report. The combined OASI and DI trust funds can remain fully solvent throughout the long-range projection if the following actions are taken:
Some combination of these solutions could be adopted. However, nothing in the current political discourse supports these actions. If substantial action is deferred, then the changes required to maintain Social Security solvency could be worse.
Long-term retirement planning should take into consideration a potential cut in Social Security benefits of 25-35% starting in 2034. Typically, it pays for most retirees to defer Social Security Benefits until 72. Decisions to defer benefits when reserve resources are finite may be challenged going forward. In practice, there is no single answer to guide decisions on Social Security benefit deferral. Each person’s decision will be different since optima deferral depends on the level of your early vs deferred benefits, your working status, and your other sources of income. For additional insight, give us a call at