Social Security: Worse Than Projected?

Social Security is in worse financial shape than reported in the Annual Report of The Trustees of Social Security and Medicare. That’s the conclusion of the Penn Wharton Budget Model of the University of Pennsylvania.

The key mistake the trustees are making, according to the academics, is overlooking the effects of federal debt. The model says this will reduce economic growth. That means future earnings growth will be less than projected by the trustees, so less tax revenue will flow into the program.

The Trustees’ projections of Social Security’s long-term finances are constructed under “static” assumptions that do not account for the effects of changing economic conditions on individual decisions to invest and work. Static projections, therefore, assume that economic conditions are expected to remain stable over time.

However, both PWBM and the Congressional Budget Office (CBO) project large increases in national debt during the next decade and beyond. Increased national debt reduces resources available for private investment, thereby reducing the size of the wage base that is used to finance Social Security benefits relative to no additional debt accruals in the future. PWBM projects that growing debt, therefore, shifts the depletion date to 2032, and produces substantially larger shortfalls than the Trustees’ projections.