Social Security isn't bankrupt: What we know about future benefits based on the latest trustees report

A new Social Security trustees report points to a slightly longer time horizon for the program's trust funds.

But even with a new depletion date of 2035 — a year later than projected last year — the program still faces a 75-year deficit.

A one-year bump represents a small change for a huge program that Alicia Munnell, director of the Center for Retirement Research at Boston College, compares to a big ocean liner. And time is running out for Congress to take action to turn it around from the direction in which it is currently going.

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In 2035, just 80% of benefits will be payable, if no action is taken.

"We're getting into that area where immediate action will be required," Munnell said.

In a new report, the Center for Retirement Research outlines some key takeaways on the program based on this year's trustees report.

Much of the shortfall Social Security faces today may be explained by changing demographics that have led to a gap between income and cost rates.

In 1964, women had an average of 3.2 children. By 1974, that fell to 1.8.

That has led to a reduced ratio of workers to retirees, especially due to the size of the baby boomer population, which is estimated to include about 73 million people. About 10,000 baby boomers turn 65 every day; by 2030, all boomers will be at least that age.

Moreover, people are living longer. Taken together, that has contributed to the program's 75-year deficit.

Social Security's trust funds help to mitigate that deficit. Their assets currently have about two years of benefits.

After legislative changes to Social Security in 1983, those assets had cash flow surpluses.

But that began to change in 2010, when the program's cost rate started to exceed its income rate. At that point, the program began tapping the interest on the trust funds in order to pay benefits.

In 2021, the government started to draw down on the trust funds in order to make benefit payments, prompted by shortfalls in taxes and interest.

These drawdowns will continue until the current projected depletion date of 2035.

In the 1980s, it was projected the program would last as long as 65 years before the trust funds ran out. Today, it is 13 years. For every year that passes, a new year with a large negative balance is added in.

Still, the program is not bankrupt.

Payroll tax revenues will continue to cover a substantial portion of benefits even after the projected depletion dates, though replacement rates are expected to drop.

Some congressional proposals look to eliminate the 75-year shortfall, including one bill recently put forward by Sens. Bernie Sanders, I-Vt., and Elizabeth Warren, D-Mass. However, Munnell is partial to a previous version of the Social Security 2100 Act proposed by Rep. John Larson, D-Conn., that would extend the program's solvency into the next century.

One prominent change in this year's trustees report was the projections for the Social Security disability insurance fund, which is now no longer projected to be depleted within 75 years. In contrast, last year's trustees report projected a depletion date of 2057 for that fund.

The number of participants in the disability program soared in the last 35 years due to a combination of factors. Legislation passed in 1984 made these benefits more accessible by broadening the definition of disability and giving applicants and medical providers more influence over the decision process. The baby boomer generation and women subsequently had higher incidence rates following those changes.

However, fewer people are receiving disability benefits now than in 2014.

This may be due to several factors, according to the Center for Retirement Research, including the economic expansion of the Great Recession, easier access to medical care after the Affordable Care Act, a shift to less-physical jobs and the closure of some Social Security field offices.

Additionally, new policies and procedures may have had a hand in the decline, particularly changes to how administrative law judges who decide disability insurance applications handle cases starting in 2009, including fewer cases per judge.

The percentage of applications approved fell to 49% in 2019 from 57% in 2009.

That lower approval rate may been further complicated during the Covid-19 pandemic, when Social Security was forced to mostly shutter its offices in 2020 to in-person appointments. The offices reopened earlier this year.

"It may be that the people who need benefits aren't getting them," Munnell said.

The updated projections for the disability fund should help quell complaints that the program is overrun with beneficiaries, she said.

"The debate hasn't really been in sync with the facts for a while," Munnell said.

Retirees are often described as "living on fixed incomes."

But that description is largely erroneous, due to the fact that Social Security is a major source of income for retirees and those benefits see annual cost-of-living adjustments for inflation every year, according to Munnell.

A record 5.9% bump to benefits went into effect in January. Admittedly, that is well below the Consumer Price Index in the months since. That includes a 9.3% increase in May over the previous 12 months for a subset of the data used to calculate the Social Security COLA every year, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.

The COLA for 2023 could be more than 8%, due to the backward-looking method for calculating the annual adjustment, which compares the third quarter for the current year over the third quarter from last year.

"Over the full cycle, it will fully compensate for inflation," Munnell said.

While there is debate over whether another measure — the Consumer Price Index for the Elderly, or CPI-E —would better reflect the costs retirees face, the two indexes have had virtually identical average annual increases from 2002 to 2021, according to the Center for Retirement Research.

Medicare Part B premiums, which cover physician and outpatient hospital services, increased by 14.5% in 2022 to bring the standard monthly premium to $170.10.

Much of that increase was prompted by the Alzheimer's drug Aduhelm. However, the price for that drug was cut in half in December to around $28,200. The use of Aduhelm was also subsequently limited to patients enrolled in clinical trials.

However, the Centers for Medicare and Medicaid Services determined it was too late to adjust the 2022 premiums.

Consequently, the Part B premium increases for 2023 may be "quite low," according to the Center for Retirement Research.

Notably, even with higher than normal premiums in 2022, beneficiaries still should have seen a bump from the above average COLA. For example, a beneficiary receiving $1,600 per month would have had a COLA of $94. After paying $22 for their Medicare premiums, their net increase would be $72, or 4.5%.