Social Security: Long May It Wave

September 13, 2021

As the 45th president fades from the political scene, the Republican Party and assorted centrists are returning to the hackneyed themes of yesteryear, one of which is the supposedly dark cloud over Social Security. As Senator Daniel Moynihan pointed out years ago, if people are led to believe the program is in trouble, they will object less if their benefits are cut.

The Board of Trustees of the Social Security trust funds issues an annual report on the condition of the programs (Old Age Insurance, Disability Insurance, and Survivors’ Insurance). An annual ritual follows, featuring lazy pundits’ citations of the report to predict doom for the program. Of course, the reports do no such thing.

The 2021 report, issued on August 31st, pinpoints 2034 as the year when the OASDI (Old Age, Survivors, and Disability Insurance) trust fund’s accumulated surpluses are exhausted. (For convenience we combine the numbers for Disability Insurance, Old Age, and Survivors, though by law the Disability Insurance trust fund is separate from the other two.)

This year’s report of the program’s Trustees might be expected to be a bit different than usual since 2020 was an unusual year, to put it mildly. However, the essential features of the Social Security program have not changed:

  1. There is no possibility – there never was – that Social Security won’t “be there” for economic reasons;
  2. There need be no threatening shortfall in revenues available to finance all the benefits promised by law;
  3. There is no difficulty implied by the increasing number of retirees, relative to the size of the nation’s workforce;
  4. The pandemic and 2020 recession make no appreciable difference to the program’s long-term outlook;
  5. It’s still a good time to revisit the slogan advanced in 1998 by the late, great economist Robert Eisner: “Social Security: More, Not Less.”

Incremental changes in revenues would close what is called the program’s actuarial deficit. (This deficit does not apply specifically to 2034.) (The actuarial deficit is the sum of future program deficits for a given period of time – usually 75 years – converted into “present value” according to the time value of money.)

The program is funded by past and current dedicated tax revenues, mostly payroll taxes, divided between employer and employee. It is financed by past payroll taxes in the sense that surpluses of these revenues over benefits in prior years were banked in the program’s trust fund and credited with interest every year since.

The term “credited” is used because these assets are funds owed by the federal government to the trust fund, basically to itself; there is no literal transfer of money. You could say an asset (interest to the Fund) and a liability (the government’s debt to the fund) are created at the same time. In the new Trustee’s report, the trust fund balance at year-end 2020 was $2,908 billion.

In the case of Social Security, there is no pot of gold or bag of money comprising the trust fund assets. There are paper certificates sitting in a file cabinet said to be in West Virginia. These are special federal securities that cannot be sold to the public; they can only be “sold” back to the government. The meaning of these bonds is that the government has committed to provide funds up to that amount for program expenses, since they represent the accumulated value of program surpluses – tax income (revenue from taxes dedicated to the program, mostly payroll taxes) minus program benefits, plus interest.

The value of the special Treasury securities held by the trust fund lies in their political significance: this was your money, and the US government has committed to returning it, with interest. Unfortunately, Congress can abrogate this promise by reducing or even eliminating program benefits. In the latter improbable event, the bonds would become a dead letter. We return to this subject below.

In 2020, tax income to the fund was $1,042 billion. Program expenses – benefits and administration – were $1,107 billion. 2020 was actually (narrowly) a surplus year, since in addition to income from taxes, the fund was credited with $76 billion in interest, for a total of $1,118 billion of revenue received, yielding an $11 billion surplus for the year. The fund balance, cited above, of $2,908 billion at the end of 2020 had increased a bit over the course of the year, since program expenses (after exhausting the entirety of tax income and less than the total of interest) left that $11 billion surplus.

The difference between expenses (1,107 billion) and tax income (1,042 billion) of $76 billion is derived from the redemption of bonds held by the trust fund. In other words, the special Treasury securities are sold back to the government for cash. The difference is paid from the government’s general revenue, some of which comes from borrowed funds, the same as if you redeemed a savings bond.

In future years, expenses are projected to grow faster than tax income and interest earnings, which means that the trust fund’s reserves will be progressively reduced. As noted at the outset, the Trustees’ report projects it to hit zero in 2034.

At no point is the Fund “broke,” since if over a hundred million workers are paying payroll tax, the Fund has revenue. The notion that the program could somehow “not be there” or “run out of money” was always ridiculous. It is easy for the government to erase the program’s actuarial deficit, as well as the shortfall in 2034, with additional revenues. Modest tax changes would allow tax income plus interest to grow fast enough to prevent exhaustion of the trust fund’s reserves indefinitely.

For the sake of argument, taking 2034 as the year of trust fund balance exhaustion, let’s talk about 2030. In 2030, noninterest (tax) income is projected at $1,586 billion, while costs are $1,937 billion. The balance of $351 billion would be taken from trust fund reserves, as described above. Going into that year, there are still $1,641 billion in reserves. The Fund cashes out enough bonds to cover the difference. All promised benefits would be paid. This can be done legally since there will be a balance in the Fund. In fact, it has also been done in the past. In 2018, the Fund needed to tap its reserves in the amount of $19 billion to cover program expenses. This was a non-event.

According to the Trustees, in 2033 the program’s expenses are totally covered by a combination of tax income and a drawdown of trust fund reserves. All promised benefits can be paid. The redemptions are financed by federal government revenues not dedicated to the program: taxes and borrowed funds.

No particular amount of borrowing is due to the program itself, any more than any other federal budget expenditure. The federal budget deficit is a single number. It does not consist of hundreds of pieces for this or that specific purpose since most federal programs are not financed with dedicated revenues. In this sense, Social Security and Medicare are the only components of the federal government that are substantially funded. It’s the rest of the federal government that is one gigantic “unfunded liability.”

In 2034, the gap between program expenses and dedicated revenues is estimated to be 22 percent of program expenses. By law, if the trust fund balance has dwindled to zero, the program is not permitted to pay out more than what it receives in dedicated revenues in benefits.

What is commonly misunderstood is that this does not require an immediate, huge tax increase of 22 percent of program expenses to fill the gap. By law and according to the projections, taxes will have been needed to fill such gaps over the preceding 12 years. For instance, the amount grows from $65 billion in 2020 to $351 billion in 2030. No sudden cut in benefits or pressure on federal taxes are implied. All that is required is for revenues previously used to cover trust fund withdrawals to be classified as dedicated to topping up any cash deficits going forward.

$351 billion would be a lot of money in the context of this year’s federal budget or GDP. By 2030, however, projected GDP is $33,151 billion, of which $351 billion would be about one percent. As noted above, this one percent would not result from an immediate addition to taxes but would, in effect, be phased in over the previous decade. Tax increases of this magnitude have occurred over much shorter time periods in the past.

The 2034 problem is political, not economic. By law, absent any move by the Congress to increase trust fund receipts, benefits must be chopped down to match dedicated taxes. But whatever money was available to fill the gap between tax income and program costs before 2034 will still be available. The year-to-year increase will be very small, in the grand scheme of the federal budget and US GDP. For instance, the asset drawdown in 2029 is projected at $312 billion. In 2030 it is the $351 billion, so the year-to-year increase would be $39 billion, in that $33 trillion economy (about a tenth of a percent).

The typical scare rhetoric on Social Security likes to throw out the term “insolvency.” As we have shown, the year of trust fund exhaustion, when “insolvency” rears its ugly head, is a non-event as far as the economy and taxation are concerned. Whatever taxes were used to redeem trust fund securities in 2033 will still be there in 2034. The implied change in cost (net of those taxes) would be the aforementioned $39 billion. Insolvency sounds like an economic problem. It is really a legal and political matter. Resources assigned to finance benefits by law suddenly decrease in 2034. The government’s ability to pay such benefits do not change at all.

The other canard circulated by the reemergent deficit hawks, such as the Committee for a Non-Responsive Federal Budget, is hysteria about the program’s “cash deficit.” This so-called deficit is premised on ignoring the trust fund’s accumulated trillions of surpluses. In effect, it implies there is no trust fund and no interest. Of course, if there is no trust fund, it can’t be “broke.” Neither does the Department of Defense have a trust fund.

A recent gambit from enemies of the program is the so-called “TRUST Act,” championed by Senators Mitt Romney (R-UT), Joe Manchin (D-WV), Krysten Sinema (D-AZ) and other luminaries, which would empower special Congressional committees to fix what ain’t broke, specifically to concoct remedies for the nonevent of “insolvency.” The committees’ proposals would benefit from lack of public exposure while being formulated to fast-track votes in Congress. The Act has received strong support in the past from over 70 senators and the so-called “Blue Dog” faction in the House of Representatives, so its enactment is not beyond the realm of possibility. There is talk from Republicans such as Senator Lindsey Graham (R-SC) of trading an increase in the debt-ceiling for passage of the Act.

Workers and Retirees

Another common fear stems from the aging of the population. The decrease in the ratio of workers to beneficiaries is often cited as an alarming development: more mouths to feed, and fewer people to feed them. Robert Eisner used to make the point that the increase in elderly is partly offset by a decrease in children as a percent of the population. They need to be fed as well.

John Quiggin points out that the customary age brackets for considering population aging are outmoded. Prime working age is usually set from 15 to 65. But in recent decades, people have begun and ended their careers at later ages. The young spend more time prior to assuming full-time, year-round work, the years of peak incomes for older workers have shifted up somewhat, and workers not debilitated by a lifetime of manual labor are retiring later.

That aside, in what follows we adhere to the conventional definition of “prime age” workers – those aged 16 to 65. Covered workers per beneficiary in 2020 is reported at 2.7. By 2045, it falls to 2.2 (unchanged from the previous year’s report). The percentage point reduction (0.5/2.7) is often cited to scare people. However, that same ratio by 2020 had already fallen from 5.1 in 1960 by more than half, with no adverse consequences. Comparing these ratios, especially over long periods of time, is a purely polemical exercise; it ignores trends in productivity growth.

Moving from 2020 to 2035 does in fact show further decreases in the ratio. However, in keeping with productivity growth, acknowledged by the Trustees, what’s missing here is the parallel increase in wages. In particular, taxable payroll between 2020 and 2095 nearly tracks GDP growth; there is a decrease of just three percentage points (Table VI.G5, p. 222). Over 75 years, that isn’t much.

The program’s financing need not be limited to the current payroll tax. As this CEPR article shows, increasing wage inequality means more and more potential taxable payroll falls above the current “taxable maximum” ($142,800 a year in 2021). Incremental tax base expansion spread over this lengthy period can ensure that dedicated payroll tax revenue keeps up with costs.

The Trustees’ projections of revenues are unambiguously conservative. Under their “intermediate cost” scenario, the results of which we have been using here, the unemployment rate is projected at 4.5 percent. The most recent rate, after the huge economic downturn and with an incomplete recovery, is 5.4 percent. Last February it was 3.5 percent. Even under their optimistic projection, the assumption is 4 percent.

We should note that these long-run “minimums” assume a permanent employment deficit for people of color. Recent experience has demonstrated unequivocally that both assumptions are overly pessimistic. More realistic assumptions would move out the date of trust fund exhaustion and slow down the increasing resort to general revenue to supplement dedicated payroll tax proceeds.

As before, determination of the payroll tax base and rates, and even the assumptions used by the Trustees, are political matters, not economic ones. The Biden Administration proposes increases in the payroll tax rate for payroll above $400,000 a year, with the proceeds dedicated to Medicare. They have also spoken of increasing taxes to bolster Social Security benefits but have yet to propose them formally. Current budget rules mean that the latter changes require a supermajority of 60 votes in the Senate or an elimination of the filibuster, moves that are within the power of the Democratic majority but currently beyond its energy level.

The Social Security Deficit and the Federal Budget

For Fiscal Year 2022, the Biden Administration proposes spending of $6,011 billion and revenues of $4,174 billion, implying a total “unified budget deficit” of $1,837 billion. Spending would be 25.6 percent of GDP. As noted in our budget analysis in March of 2021, this level would comprise a noteworthy break with recent history, but one that is plausible in light of current political realities. It would still pale in size next to the public sectors in the European Union.

We noted that the gap between Social Security tax income and total expenses for 2020 was $65 billion. It has been said that the Social Security deficit enlarges the total deficit, but as noted above, the total deficit is due to the entirety of federal spending minus revenue. To attribute any particular portion of it to any particular program, including Social Security, is a non sequitur.

From the standpoint of the economy as a whole, the Social Security “deficit” is meaningless. The relevant magnitude is the total budget deficit, and it is worthwhile to view it relative to GDP to appreciate its scale properly. The 2022 deficit proposed by the administration is 7.8 percent of the 2022 GDP. In 2021and 2020, the deficit was 17 and 15 percent of GDP, respectively.

Deficits are popularly associated with inflation, but by that reasoning, we should now be seeing high inflation that will be due for a decline in 2022, given the proposed decline in deficits. Congress is likely to enact a budget with a lower deficit than proposed by the president. In any case, actual observed inflation presents no cause for alarm.

There remains a dispute about the tenable limit of employment or the minimum unemployment rate possible. As the economy approaches this limit, we would expect inflation pressures to manifest themselves. In expectation of this, the Biden Administration has proposed future increases in taxes. However, because of uncertainty over the future course of employment, the optimal timing of new taxes is uncertain. Premature institution of tax increases would slow down the recovery. What should be clear is that the trends of Social Security over the next 75 years are a separate and arguably secondary matter.


The pandemic worsens the outlook for Social Security, as indeed does any economic downturn, but in the current circumstances, only marginally. As noted at the outset, the “year zero” of trust fund exhaustion, its exaggerated importance notwithstanding, is only moved closer by a single year. We note in passing that the Disability Insurance (DI) program, a topic of concern in recent years due to enrollment increases, is in much better shape than the Old Age/Survivors Fund. The DI fund is projected to retain reserves until 2057.

In general, the pandemic had several partially offsetting effects on the financial condition of Social Security. The economic downturn and ensuing unemployment reduce payroll tax revenue. Fatalities of retirees due to the pandemic reduced benefit payments, to some extent offset in turn by an increase in Survivors’ benefits. Disability claims and associated benefits have not seen an increase, though this could be due to the closure of Social Security offices. The Social Security Trust Fund’s Actuaries assume birth rates will decline somewhat due to women delaying plans to have children.

Social Security’s chief actuary, Stephen Goss, asserted last year that “the pandemic-induced recession may be largely recovered by 2023 with little permanent effect.” The most recent GDP and employment data indicate that the decreases in 2020 have now been largely reversed. By the second quarter of this year, real GDP had surpassed its level at the end of 2019. Employment has returned to 96 percent of its peak in February of 2020. Goss’s presentation a month ago reported improved projections due to the surprising pace of the recovery to date. Wages actually increased in 2020, contrary to expectations (Goss and Glenn, slide 19).

It still follows that any temporary downturn has permanent negative long-term effects. In March 2020, Goss projected a lower trajectory for GDP, productivity, and earnings of one percent. This would need to be dialed down considering the improved economic performance observed since then.

The roots of long-run average productivity are poorly understood. Less uncertain are policies that can boost GDP and employment. As for the taxation of earnings, employment and GDP are policy choices to an important extent. The same could be said of immigration, another casualty of problematic policies. More working-age immigrants improve the status of the program.

Social Security: More, Not Less

The average monthly Social Security benefit is $1,548. For the bottom 80 percent of the population, wealth outside of owner-occupied homes is minimal. Dependence on Social Security as the sole source of income places millions of households in financially precarious circumstances.

As noted above, the Biden Administration has spoken of increasing the minimum benefit, but the reader can easily judge the adequacy of a marginally higher, average benefit as the basis for a decent standard of living. What else might be done?

In light of the feasibility of increasing dedicated revenues to eliminate the accumulation of deficits over the next 75 years, it follows that benefit increases would be possible with adjustments of two types. One is somewhat greater adjustments to expand dedicated revenues. The other is the adoption of a different outlook towards future projected program deficits.

As Eric Kingson and Nancy Altman point out, Social Security was originally conceived of as part of a “three-legged stool” providing financial security for US workers. The other two legs were employer pensions and individual savings. Over the past decades, both of the other legs have withered away. Employer pensions have been converted to 401(k)s and Individual Retirement Accounts, putting retirees at the mercy of the stock market. Wage stagnation and near-zero rates of return on savings accounts have made wealth accumulation inordinately difficult.

The most obvious response is to increase benefits, as Senators Bernie Sanders, Elizabeth Warren, and others have proposed. One exemplary piece of legislation is from Rep. John B. Larson (D-CT). But cash is not the only issue.

Social Security’s Old Age Insurance is devoted to retired workers with an earnings record. Naturally, these are elderly persons, but a shortage of cash income is not the only financial challenge facing the elderly. There is also the rising cost of health care, only partially offset by Medicare, and the absence of provisions for long-term care. The latter refers to arrangements for the care of those unable to care for themselves. More Social Security is not a practical remedy for the shortcomings of US health care. Disability Insurance is received by those unable to work, for whom health care and long-term care also loom as great challenges.

On Social Security and long-term budget planning, the truth is that economists have no idea what the economy might be like in 20 years, let alone 75. Seventy-five years ago, Franklin D. Roosevelt was president of the United States and Frank Sinatra was a teen idol. Could anyone then have foreseen our current state of affairs? Over the past 40 years, within forecast windows as short as five years, the potential for unemployment to fall has been consistently underestimated and the dangers of inflation repeatedly overstated.

The key datum for national economic policy is not the Social Security program deficit. It is the unified federal budget deficit. If inflation looms, it is a signal that the economy might be in danger of “over-heating,” and countervailing steps will be in order. The provisions for Social Security are an entirely separate matter.

Budget planning is more concerned with the next five years, not seventy-five. In that context, the need to adjust deficits – up or down – does pertain to Social Security spending and its dedicated taxes, but only because it is a large share of federal fiscal operations. However, the aim of social insurance is to provide economic security that permits households to plan based on reliable expectations of income. It would not do to jigger benefit levels in real time without an extended grace period of 10 or more years. Reflecting this, in practice, Social Security reforms that affect workers older than 55 are seldom proposed. It follows that fiscal policies to avert inflation have no business fiddling with Social Security.

In the past, the 75-year projections were invoked to trigger more immediate policy changes. But since knowledge of economic conditions even 10 years out is lacking, there is little basis for such initiatives.

It follows that changes in Social Security and federal macroeconomic policies concerned with inflation are entirely separate fields of decision-making. The converse need not apply. Unanticipated, booming prosperity is a reasonable basis for considering the expansion of benefits. A more rapidly growing economy can ensure greater economic security for retirees, the disabled, and their survivors, among others.

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