When it comes to predicting Social Security’s financial future, the Social Security Trustees Report includes three sets of estimates based on various assumptions about future birth rates, economic growth, inflation, wage growth, interest rates, and other things. They are known as the intermediate, low, and high-cost situations.
All of the key forecasts about Social Security’s future have been based on intermediate estimates, including the projection that the trust funds will run out of money by 2035.
The Two Eventualities That Beneficiaries May Confront About Their Social Security Benefits
The intermediate possibilities make the following assumptions: 1.63% annual economic growth, 2.4% average annual inflation, 3.56% annual wage growth, 4.5% unemployment, and a 2.3% average interest rate on Treasury securities held by Social Security; all of these scenarios assume a total fertility rate (number of children per woman) of 1.9 by 2040 and beyond.
However, there is no guarantee that these are the correct figures, which is why it is vital to understand the other two scenarios and their ramifications. Although these are simply median projections, it would be beneficial to Social Security if they changed in certain directions. To name a few.
- Higher fertility rates suggest that more workers will contribute to Social Security.
- Lower unemployment rates imply that a greater proportion of the available workforce will receive Social Security-taxable income.
- Higher Treasury security interest rates lead to more interest income flowing into the program from Social Security reserves.
- Faster wage growth would result in higher total income due to the Social Security tax.
On the other hand, the low-cost scenario makes more aggressive, but still plausible, assumptions about these and other issues. For example, it assumes:
- A fertility rate forecast of approximately 2.1 children per woman.
- The average economic growth rate is 1.93 percent.
- The average inflation rate is zero percent.
- The average wage rose by 79% (1.74% after inflation).
- 5% unemployment rate.
- The average interest rate on new Treasury securities is 8%.
It also expects a higher rate of immigration into the United States (both legal and non-legal permanent residents), which will result in more taxpayers. In other words, the high-cost estimate assumes a lower fertility rate of 1.6 children, moderate economic growth of 1.33%, yearly inflation of 1.8%, and average unemployment of 5.5%, all of which are conceivable scenarios.
The Social Security trust funds are expected to run out of money in 2035, with the high-cost assumptions pushing that date forward to 2032. Under the low-cost scenario, however, the trust assets will not be depleted until 2080, 45 years later than anticipated, and will then begin to grow again a few years later.
This suggests that the low-cost scenario is unrealistic and that the system requires reform; nonetheless, even with bold assumptions, the funds will eventually run out of money. Finally, if the only way to keep the Social Security system running is to reduce benefits, beneficiaries must understand the actual magnitude of the cut so that they may plan how to offset the difference and balance their financial budgets. Also, benefit decreases vary according to a retiree’s age, job experience, and lifetime earnings.
A low-income, two-earner couple retiring in 2033—as defined by the Social Security trustees—would face a $10,000 cut in payouts, according to research by the Committee for a Responsible Federal Budget that seeks to quantify the potential reduction.
A couple with two high earners would lose $21,800 in income. As a result, beneficiaries must begin to look for alternate ways to guarantee their financial future, as well as be informed about how the Social Security system may change and the impact on their Social Security income.