2014 OASDI Trustees Report

E. CONCLUSION

Under current law, the projected cost of Social Security increases faster than projected income through about 2035 primarily because of the aging of the baby-boom generation and relatively low fertility since the baby-boom period. Cost will continue to grow faster than income, but to a lesser degree, after 2035 due to increasing life expectancy. Based on the Trustees’ best estimate, program cost exceeds non-interest income for 2014, as it has since 2010, and remains higher than non-interest income throughout the remainder of the 75‑year projection period. Social Security’s theoretical combined trust funds increase with the help of interest income through 2019 and allow full payment of scheduled benefits on a timely basis until the trust fund asset reserves become depleted in 2033. At that time, projected continuing income to the combined trust funds equals about 77 percent of program cost. By 2088, continuing income equals about 72 percent of program cost.

The Trustees project that the OASI Trust Fund and the DI Trust Fund will have sufficient reserves to pay full benefits on time until 2034 and 2016, respectively. Legislative action is needed as soon as possible to prevent depletion of the DI Trust Fund reserves in 2016, at which time continuing income to the DI Trust Fund would be sufficient to pay 81 percent of DI benefits. Lawmakers may consider responding to the impending DI Trust Fund reserve depletion as they did in 1994, solely by reallocating the payroll tax rate between OASI and DI. Such a response might serve to delay DI reforms and much needed corrections for OASDI as a whole. However, enactment of a more permanent solution could include a tax reallocation in the short-run.

The Trustees estimate that the 75-year actuarial deficit for the combined trust funds is 2.88 percent of taxable payroll — 0.16 percentage point larger than the 2.72 percent deficit in last year’s report. For the combined OASI and DI Trust Funds to remain fully solvent throughout the 75-year projection period: (1) revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.83 percentage points (from its current level of 12.40 percent to 15.23 percent; a relative increase of 22.8 percent); (2) scheduled benefits during the period would have to be reduced by an amount equivalent to an immediate and permanent reduction of 17.4 percent applied to all current and future beneficiaries, or 20.8 percent if the reductions were applied only to those who become initially eligible for benefits in 2014 or later; or (3) some combination of these approaches would have to be adopted. Under these scenarios, non-interest income would initially be substantially greater than expenditures, and trust fund reserves would accumulate rapidly. Subsequently, however, non-interest income alone would be inadequate, and reserves would be drawn down to cover the differences. This illustrates that if lawmakers were to design legislative solutions only to eliminate the overall actuarial deficit without consideration of year-by-year patterns, then a substantial financial imbalance could remain at the end of the period, and the long-range sustainability of program financing could still be in doubt.

If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2033. In order to maintain solvency throughout the 75-year projection period and finance scheduled benefits fully in every year starting in 2033, it would be necessary to increase revenues by an amount equivalent to a payroll tax rate increase of about 4.2 percentage points (yielding a total payroll tax rate of about 16.6 percent) at the point of trust fund reserve depletion, with the total rate reaching about 17.7 percent in 2088. Alternatively, solvency could be maintained if benefits were reduced to the level that would be payable with scheduled tax rates and earnings subject to tax in each year beginning in 2033. At the point of combined trust fund reserve depletion in 2033, this would be equivalent to a reduction in all scheduled benefits of 23 percent, with reductions reaching 28 percent in 2088. In addition, of course, there is a continuum of policies combining tax increases with benefit reductions that would maintain solvency at the point of trust fund depletion.

Some strategies for achieving solvency would not be feasible if delayed until trust fund reserve depletion in 2033. For example, even a temporary 100-percent benefit reduction for those newly eligible for benefits in 2033 would not by itself make it possible to pay all benefits scheduled for payment in that year to those already receiving or eligible to receive benefits.

If the life expectancy of the population continues to improve after the end of the 75‑year period, Social Security’s annual cost will very likely continue to grow faster than non-interest income after 2088. As a result, lawmakers would have to make additional changes to ensure solvency of the system beyond 2088. Making changes now that achieve sustainable solvency (that is, result in a trust fund ratio that is positive throughout the long-range period and is either level or increasing at the end of the period) could avoid the need for later legislative changes.

The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them. Implementing changes soon would allow more generations to share in the needed revenue increases or reductions in scheduled benefits. Social Security will play a critical role in the lives of 59 million beneficiaries and 165 million covered workers and their families in 2014. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.

For further information related to the contents of this report, see the following websites:

•	www.socialsecurity.gov/oact/tr/2014/index.html

•	www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/index.html

•	www.treasury.gov/resource-center/economic-policy/ss-medicare/Pages/social_security.aspx