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Social Security: Selected Findings of the 2022 Annual Report

Social Security: Selected Findings of the 2022 Annual Report
June 14, 2022 (IF12133)

According to the recent report of the Board of Trustees of the Social Security Trust Funds, the program's finances are in a similar, albeit marginally better, position in 2022 relative to what they were in 2021. This relative improvement is largely attributed to a stronger-than-expected recovery from the recession experienced in 2020. Under intermediate assumptions, the projected combined trust fund asset depletion date is 2035 (versus 2034 in last year's report), after which the percentage of benefits payable would be 80% (versus 78% in 2021).

Social Security Overview

Social Security is a self-financing program that in 2022 covers approximately 178 million workers and provides monthly cash benefits to over 65 million beneficiaries. It is the federal government's largest program in terms of both the number of people affected (i.e., covered workers and beneficiaries) and its finances. Social Security is composed of Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI), referred to collectively as OASDI.

The OASDI program is primarily financed (90.1% of total revenues in 2021) through a payroll tax applied to Social Security–covered earnings up to an annual limit. Some beneficiaries pay income tax on a portion of their Social Security benefits (3.5% of total revenue in 2021). From 1983 to 2009, the OASDI program collected more in tax revenues than needed to pay benefits. Excess revenues are held in interest-bearing U.S. Treasury securities, providing a third source of funding for the program (6.4% of total revenues in 2021). Monthly benefits are the largest OASDI program cost (99.0% of total costs in 2021). Administrative and other costs accounted for the remainder.

The Trust Funds

Both the OASI and DI programs use a trust fund financing mechanism. Monies credited to these trust funds are earmarked for paying Social Security benefits and certain administrative costs. Using a trust fund allows OASI and DI programs to track their respective programs' revenues and costs and to hold any accumulated assets from years when revenues exceed costs. The OASI Trust Fund and DI Trust Fund are legally distinct entities. They are discussed here collectively as the OASDI trust funds.

A Board of Trustees manages the trust funds. The trustees are required to report to Congress annually on the trust funds' status and financial operations. In general, the trust funds' solvency—the ability to pay full benefits scheduled under current law on a timely basis—indicates their status. If assets held in the trust funds were to be depleted, the OASDI program could pay out in benefits only what it receives in revenues. Table 1 shows the trust funds' key dates under the trustees' intermediate assumptions, which reflect their best estimate of future experience.

Table 1. Key Dates Projected for the Social Security Trust Funds in the 2021 and 2022 Trustees Reports

(Under the Trustees' Intermediate Assumptions)

 

2021 Report

2022 Report

 

OASI

DI

OASDI

OASI

DI

OASDI

Cost exceeds noninterest revenues

2010

2040

2010

2010

2044

2010

Cost exceeds total revenues

2021

2045

2021

2021

2090

2021

Trust fund reserves depleted

2033

2057

2034

2034

>2096

2035

Source: CRS, based on the 2021 and 2022 OASDI trustees report.

In the 2022 report, the trustees project a date of 2034 for OASI trust fund reserve depletion. The DI trust fund is not projected to become depleted in the 75-year projection period. As stated, "The DI program continues to have low levels of disability applications and benefit awards for 2021. Disability applications have declined substantially since 2010, and the total number of disabled-worker beneficiaries in current payment status has been falling since 2014." The 2020 report marks the first instance since the 1983 report that the DI trust fund is not projected to become depleted inside the 75-year projection period.

In the previous year's (2021) report, as shown in Table 2, the trustees projected that the trust funds' overall balance (i.e., the total amount of accumulated asset reserves) would decrease. Asset reserves held in the trust funds decreased less than expected during 2021 owing to larger-than-projected revenues and lower-than-projected costs.

Table 2. Financial Operations for the Social Security Trust Funds in the 2021 and 2022 Trustees Reports

(In Billions; Under the Trustees' Intermediate Assumptions)

 

2021
(projected)

2021
(actual)

2022
(projected)

Starting trust funds' reserves

$2,908.3

$2,908.3

$2,852.0

Total revenue

1,073.8

1,088.3

1,195.8

Total costs

1,151.0

1,144.6

1,242.7

Change in trust funds' reserves

-77.3

-56.3

-46.8

Ending trust funds' reserves

2,831.0

2,852.0

2,805.2

Source: CRS, based on the 2021 and 2022 OASDI trustees report.

Since 2010, total costs (i.e., scheduled benefits) have exceeded noninterest revenue (i.e., tax revenues). In 2021, total costs exceeded total revenues (i.e., tax revenues and interest revenue). The same projection is made in this year's report (Table 1). If this projection were to be realized, the trust fund asset reserves would continue to decrease. As such, trust fund asset reserves are predicted to decline from its peak value of $2.91 trillion in 2021 to $0 in 2035. Upon the trust funds' asset reserves depletion, the trustees project that income from tax revenues would be sufficient to pay approximately 80% of scheduled benefits for the remainder of the projection period (2035-2096) versus 78% in 2021.

Projected Long-Range Financial Outlook

The 2022 report projects a long-range funding shortfall. The funding shortfall is largely a result of rising costs over the 75-year projection period, primarily due to demographic trends. The ratio of OASDI beneficiaries per 100 covered workers, a common indicator of rising costs, is projected to remain relatively the same as that in the 2021 annual report. The 2021 report projected an average of 45.5 beneficiaries per 100 covered workers over the 75-year projection; the 2022 report projects this ratio to be 45.4 beneficiaries per 100 covered workers. Although the projected ratio of beneficiaries to workers remains relatively the same, program costs are projected to grow faster than program revenues. In 2021, the trustees estimated that costs would exceed revenues by 22.7% over the projection period. In 2022, the trustees estimate that costs will exceed revenues by 22.0% over the next 75 years.

If the total program revenues were to exceed total costs annually, the program would have a surplus; if the total program costs were to exceed the total revenues, the program would have a deficit. The trustees project the program to have a deficit in 2022—just as in 2021—and for all remaining years in the 75-year projection period.

The actuarial balance, a summarized measure of the annual surpluses and deficits over the projection period, is one measure of the Social Security program's long-range financial position. When the actuarial balance results in higher costs than revenues over the projection period, the program is described as having an actuarial deficit. In 2021, the trustees estimated the long-range actuarial deficit over the next 75 years to average 3.54% of taxable payroll (i.e., total earnings subject to the OASDI payroll tax with some adjustments). In 2022, the trustees estimated the long-range actuarial deficit over the next 75 years to average 3.42% of taxable payroll. This amount represents the average increase in the payroll tax over the 75-year projection period that would be needed for the program to pay full scheduled benefits on time.

The change in the estimated actuarial deficit, a decrease of 0.12% of taxable payroll, is mainly attributable to the recent—and favorable—economic experience and changes in disability data and assumptions. Although long-term economic assumptions were unchanged in this year's report, updates to recent data, reflecting a stronger-than-expected recovery from the pandemic-induced recession, improved the long-range actuarial balance. Disabled-worker application and incidence rates continued to drop during 2021, and the trustees decreased assumptions for future disability incidence rates. As in previous years, a shifting of the 75-year valuation period—from 2021-2095 to 2022-2096—means that a large negative annual balance for 2096 is now included in the actuarial balance. However, this negative effect was more than offset by the positive effects in changes to economic and disability data and assumptions.

Annual Balances

In the 2022 report, the trustees project the annual balances (i.e., difference between revenues and costs on an annual basis) to reflect a smaller deficit (i.e., less negative) for all years in the projection period. Similarly, the trustees attribute the changes in annual balances to changes in economic factors and disability incidence rates. Over the 75-year projection period, annual balances are greater than last year's report by an average of 0.18 percentage points.

COVID-19

The 2022 report acknowledged the "continuing significant" effects of the COVID-19 pandemic on the program's near-term status and the pandemic's uncertain long-term effects. However, the trustees state, "On balance, the projected long-range actuarial status of the OASI and DI Trust Funds has been little changed by the effects of the pandemic and ensuing recession, considering both the effects realized to date and those yet expected."

What Can Be Done?

The trustees project that in 13 years Social Security will be unable to pay scheduled benefits in full and on time. To illustrate the magnitude of changes needed to make Social Security solvent over the next 75 years, the trustees estimate the hypothetical payroll tax increase or hypothetical benefit reduction needed to maintain solvency (Table 3). These hypothetical changes would take immediate effect and apply to all current and future beneficiaries. The table also shows estimates for changes that would be needed at the projected 2035 insolvency date.

Table 3. Hypothetical Measures to Maintain Solvency

 

2021 Report

2022 Report

 

2021

2034

2022

2035

Payroll tax increase
(in percentage points [pp])

3.36 pp

4.20 pp

3.24 pp

4.07 pp

Scheduled benefit reduction

21%

26%

20%

25%

Source: CRS, based on the 2021 and 2022 OASDI trustees report.

In the 2022 report, the size of the payroll tax increase and benefit reduction needed to maintain solvency are smaller than estimated in 2021. A noted parallel to last year's report is that as time elapses, the magnitude of the changes needed to maintain Social Security solvency increases. This characteristic is attributable to the program's rising costs and suggests that the portfolio of legislative options to achieve solvency decreases as the trust funds approach the projected depletion date. As in many previous reports, the trustees state, "Implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits."