Social Security Reserves Projected to Run Out Earlier Than Expected

Slower growth, higher inflation to challenge program’s finances

An economic slowdown, persistent inflation and weaker productivity growth will hurt Social Security’s finances, draining its reserves one year earlier than previously estimated, the government said Friday.

Social Security won’t have enough money to pay all beneficiaries the amount they are entitled to starting in 2034, according to the latest report by the program’s trustees. Unless Congress takes action to shore up the program, beneficiaries would receive about 80% of their scheduled benefits after that point.

Lower birthrates over the past few decades combined with a wave of retiring baby boomers have challenged the long-term solvency of Social Security, which pays benefits to retirees, their survivors and people with disabilities. In 2021, Social Security began paying more in benefits than it was receiving through payroll taxes and interest on the specially issued Treasury securities it holds in reserve. That has reduced the size of its trust fund to $2.8 trillion in 2022 from $2.9 trillion in 2020. The trust fund will continue to shrink until 2034, when it will run out of money, the report said. After that, benefits will have to be cut to account for lower revenues. A separate report on Medicare showed that its finances are improving thanks to lower projected healthcare spending than in last year’s report. Medicare’s hospital-insurance trust fund will be able to cover all benefits until 2031, three years longer than forecast last year, the report said.

Democrats and Republicans are expected to launch spending talks this year, but any changes to Social Security or Medicare are off the table in negotiations around raising the nation’s borrowing limit. Republicans want deep spending cuts as a condition for backing a debt-ceiling increase, but they acknowledge that any changes to entitlements would be dead on arrival and politically radioactive unless they have broad bipartisan support. To improve Social Security’s long-term finances, Congress could cut benefits, raise taxes or a combination of the two.

To keep the program solvent for the next 75 years, taxes would have to immediately rise 3.44 percentage points to 15.84%, split between employees and employers, the Social Security trustees’ report said. Right now, employees and employers both contribute 6.2% of payroll, for a combined 12.4% tax rate.

An immediate 21.3% cut in benefits would also put the program on sounder footing without raising taxes, the report said.

Slower-than-expected economic growth and higher-than-expected inflation reduced the projected level of gross domestic product and labor productivity by 3% over the 75-year projection period compared with last year’s estimates, the report said. Inflation-adjusted interest rates are also expected to be higher than forecast in last year’s report. The U.S. economy slowed last year, following a strong rebound in 2021 as pandemic-related disruptions eased. GDP rose 0.9% in the fourth quarter of 2022 over the same quarter a year ago, down from 5.7% in 2021, the Commerce Department reported Thursday.