As Social Security faces insolvency, these are key factors to watch

A new Social Security trustees report released on Monday provides a modest bright spot for the program.

The program’s combined funds are now projected to run out in 2035 — one year later than was previously anticipated. At that time, 83% of benefits will be payable, unless Congress takes action before that date to prevent an across-the-board benefit cut.

The later projected depletion date is due to an improved economy, according to the trustees report. That includes higher labor productivity that enables workers to contribute to the program through payroll taxes.

But experts say that’s where the good news ends, and the revelations from the trustees’ report point to the need for congressional action.

“Unless something changes more of the economy rapidly or dramatically, we’re going to have trust fund depletion in the next 10 years,” Jason Fichtner, chief economist at the Bipartisan Policy Center said during a Tuesday panel hosted by the Committee for a Responsible Federal Budget.

The trust fund shortfall may be addressed through tax increases, benefit cuts or by taking funds from general revenues, he said.

While the national debt is $34 trillion, Social Security’s unfunded liability is around $22 trillion, Fichtner said. To make the program solvent for 75 years, an upfront sum of $22 trillion would be necessary today.

“That’s a lot of borrowing,” he said.

The longer lawmakers wait, the larger the changes that will be necessary.

Because it is an election year, there likely won’t be action now, said Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare, in an interview. But Social Security is poised to be an issue in the upcoming House, Senate and presidential campaigns, he said.

Here are some key revelations to note from this year’s Social Security trustees report.

1. Retirement fund depletion date is less than a decade away

While the overall outlook for Social Security’s trust funds improved, the depletion date for the fund used to pay retirement benefits remains unchanged.

In 2033, that fund will be depleted, at which point 79% of benefits will be payable.

As that depletion date gets closer — with it now just nine years away — there are fewer factors that could change that forecast, Fichtner said.

2.  Disability fund is in good shape — for now

A separate trust fund used to pay disability benefits should be able to pay full benefits through 2098 — the last year of the report’s projection period.

The good news is that points to fewer disability benefits being paid from that trust fund, Social Security expert Laura Haltzel, a former research manager at Congressional Research Service, noted during the webinar. Because those individuals are still in the work force, it means they are continuing to contribute to the program, she said.

But that fund is “very, very sensitive to economic conditions,” Fichtner said.

If there is a major recession, many workers who are at the margin may apply for disability benefits, he said. That may affect that trust fund’s solvency.

“I don’t think we should say that [disability insurance] is fine and we’re out in the woods,” Fichtner said. “We need to keep an eye on it.”

3. The insolvency projection has not shifted  

Since 2012, Social Security’s trustees have predicted the insolvency date would be between 2033 and 2035.

As the new trustees’ report projects the combined funds may last to 2035, that has not changed, Haltzel noted.

“The actuarial deficit really has not shifted that much,” Haltzel said.

4.  A declining birth rate may impact the program

Social Security’s trustees have revised the total fertility rate assumption to 1.9 children per woman, down from 2.0, which is the lowest that has ever been assumed, senior Treasury officials noted.

The birth rate is an important part of long-term projections, Linda K. Stone, senior retirement fellow at the American Academy of Actuaries, said in an interview with CNBC.

“It’s going to take 20 years, 18 years for the children being born now to actually be workers and paying taxes into the system,” Stone said.

5.  Immigration may help give the program a boost

Immigration may help bring in more workers to help pay taxes into the program.

“Immigration absolutely can and should be part of what the solution is,” Haltzel said.

Legal immigration is preferred, she said, but the effects of illegal immigration on the program are frequently misunderstood.

Many illegal immigrants tend to adopt a false Social Security number, she said. While they pay into the program through payroll taxes, they are ineligible to actually claim benefits.

“We actually end up benefiting in a very unfortunate way from illegal immigration,” she said.

Immigrants may also have a higher birth rate, Stone said.

“That’s more future workers also entering the system,” she said.

6.  More dramatic changes will be necessary with time

As lawmakers procrastinate when it comes to addressing Social Security, the solutions needed to address the program get more dramatic.

During President Barack Obama’s presidency, eliminating the maximum threshold on taxable earnings would have restored the program’s 75-year solvency, said Fichtner.

Now, a combination of changes would be needed to get the same results. One suggestion that often comes up is raising the retirement age.

“We’ve lost our ‘one and done’ policy options,” Fichtner said.

On Capitol Hill, Social Security tends to become a partisan battle, Richtman said. But most Americans want to see the benefits they’ve earned preserved.

Voters should ask candidates where they stand on the issue, Richtman said.

“Everybody’s for Social Security in theory. But what are your positions on making sure that it continues and is improved?” Richtman said. “That’s the real question.”