Social Security Unfunded Liabilities Reach $63 Trillion: Solutions and Projections

Social Security's $63 Trillion Unfunded Liabilities The Social Security system is staring at $63 trillion in long-term unfunded liabilities, as per the 2024 Old-Age, Survivors, Disability Insurance (OASDI) trustees report. The report examines two key aspects: the amount of money that will be indefinitely lacking and the amount that will be missing in the next 75 years. The report concludes that there will be a permanent deficit of $62.8 trillion and a shortage of about $23 trillion for the next 75 years. The officials clarified that these figures represent the shortfall in funds after the money saved in trust funds is exhausted.

Increasing Life Expectancy and Shortfalls

The report states that the annual shortfalls after the depletion of trust fund reserves gradually increase, reflecting the rise in life expectancy. The summarized shortfalls over the infinite horizon, as percentages of taxable payroll and GDP, are larger than the shortfalls for the 75-year period. The OASDI trustees suggested that the shortfall could be eliminated if the combined payroll tax rate was raised to approximately 17.0 percent or if there was a permanent reduction in benefits for all current and future beneficiaries by about 26.5 percent. Laurence Kotlikoff, a professor of economics at Boston University, emphasized the importance of assessing the current infinite unfunded liability.

Spotlight on Deteriorating Fiscal State

This is not the first report to highlight the declining fiscal health of the retirement scheme and other federal programs. In February, the Treasury Department released the “Financial Report of the United States Government,” which concluded that U.S. taxpayers face more than $78 trillion in long-term unfunded obligations for Social Security and Medicare. However, Mark Warshawsky, a senior fellow at the American Enterprise Institute, pointed out that these outlooks are based on optimistic scenarios, assuming that the United States will not face a financial crisis, a major military conflict, or another pandemic. Despite its faults, Warshawsky believes it is crucial to disseminate these numbers to the public.

Trust Fund Exhaustion Projections

Last week, the nonpartisan Congressional Budget Office (CBO) projected that an essential Social Security trust fund—the Old-Age and Survivors Insurance Trust Fund—will be exhausted by 2033. Additionally, the Disability Insurance Trust Fund balance could run dry by 2064. If Social Security remains unchanged over the next decade, recipients would face a 21 percent cut to their benefits, according to CBO Director Phillip Swagel. Over the years, lawmakers from both parties have proposed various solutions to save Social Security.

Proposed Solutions

Many economists and financial experts argue that public policymakers need to embrace reform. Laurence Kotlikoff proposed several different measures that Washington could implement to keep the Social Security system intact through a “Personal Security System.” For immediate solutions, Doug Carey, a chartered financial analyst, suggested a change to the payroll tax, although it would be challenging to pass in Congress. Another policy adjustment could be increasing the payroll tax cap. Tyler Meyer, a certified financial planner and the owner of QED Wealth Solutions, suggested modifying the benefit formula to slow the growth of benefits for higher earners while protecting lower-income beneficiaries.

Are Benefits Sufficient?

Estimates suggest that the Social Security cost-of-living adjustment (COLA) for 2025 will be close to 2.6 percent. However, a study by The Senior Citizens League found that the value of seniors’ benefits has decreased by 20 percent since 2010. This trend might be concerning for future retirees, as the Employee Benefit Research Institute (EBRI) found in April that 88 percent of workers anticipate Social Security to be a significant source of actual or expected income in retirement. Stephen Kates, principal financial analyst for Retire Guide, emphasized the importance of working with a financial adviser for guidance on how to convert savings into an income plan.

Bottom Line

The Social Security system's unfunded liabilities are a significant concern that requires immediate attention and action. The proposed solutions, while varied, all aim to ensure the system's sustainability for future generations. What are your thoughts on this matter? Do you think the proposed solutions are feasible? Share this article with your friends and let them know about this pressing issue. Remember, you can sign up for the Daily Briefing, which is delivered every day at 6pm.