The 2022 Social Security Trustees’ report is optimistic — and misleading

When the 2022 Social Security Trustees’ report was released last week, media coverage celebrated a slight improvement in the short- and long-term financial conditions of the program. The exhaustion date for the trust funds was moved back from 2034 to 2035 and the 75-year actuarial deficit was reduced from 3.54 percent of payroll to 3.42 percent.

A deeper dig into the report, however, finds these improvements are based on an unrealistically low short-term inflation forecast and an overly optimistic long-run forecast of a fertility bounce-back. More realistic estimates explained below show that the exhaustion date will instead be 2033 and the actuarial deficit is about 3.9 percent.

The trustees said that they based their 2022 assessment of improved conditions on two main factors — an improving economy affecting the short-run, and lower rates of disability affecting the medium- and long-run. In particular, the notion that the economy emerged out of recession quicker and more fully than expected last year, thereby raising employment and wages, and increasing payroll tax revenues. And that disability claims and awards continue to fall below prior projections, despite the recession and initially high unemployment.

The generous pandemic payments from the government, as well as temporarily expanded access to Medicaid, and closed Social Security field offices during the pandemic, might have been thought to explain the recent lull in disability claims, as people had other sources of support and health insurance and found the claim process more difficult. Nevertheless, the trustees decided that longer-term trends in increasing workplace accommodations and easier work conditions were sufficient causes to lower the disability assumption.

The trustees also assumed that the cost of living adjustment (COLA) for benefits, based on third quarter to third quarter changes in the consumer price index, would only be 3.8 percent next year (it was 5.9 percent this year) and 2.5 percent the year following, before returning to the assumed long-term rate of 2.4 percent. While the trustees say that their 2022 assumptions were made in mid-February, the high rate of inflation experienced in late 2021 and early 2022 can only be reconciled with a 3.8 percent annual forecast if it were thought that inflation would rapidly fall later in the year, an unreasonable forecast even at the time. In any event, the chief actuary of Social Security now says that eight percent is a better forecast for the next COLA, which will be announced in October.

Actually, at current monthly rates of inflation, 10 percent might be an even better forecast. But let’s use eight percent instead, and optimistically suppose that the Federal Reserve gets control of price inflation quickly enough to justify the following year’s 2.5 percent forecasted COLA, and assume there are no other changes in trustee assumptions.

In this situation, the increase in program expenses resulting from higher benefits would be, on average, about $45 billion a year. For context, the cost of the program was $1,145 billion in 2021. This would deplete the trust fund two years earlier than projected in the current report. While it is possible that net interest on trust fund investments will be a bit higher than projected in the report, and that wages could also come in somewhat higher, the report projects a robust 6.5 percent increase in the average wage index (AWI) next year. That’s higher than the approximate five percent rate of increase recently experienced in hourly wages. Furthermore, a 4.8 percent increase in AWI is projected for 2023, with no recession.

The assumed long-range fertility rate was surprisingly increased to 2.0 expected lifetime births per woman in the 2021 Trustees’ Report — a change from 1.95 in the 2020 Report. This increase in the overall birth rate came despite a rapid drop in the fertility rate over the last 15 years when it fell to 1.64 in 2020. The trustees have maintained their 2.0 assumption in the current report. The Congressional Budget Office however projects a 1.8 fertility rate.

Indeed, new survey evidence and analysis of the expectations for women having children over their lifetimes is consistent with an overall fertility rate closer to 1.7 or 1.8, and not just a delay in the timing of women having children. Based on my calculations from the data in the report, a 1.8 fertility rate leads to a much larger actuarial deficit, 3.9 percent of payroll, than the currently stated 3.42 percent. The impact is especially noticeable towards the end of the 75-year horizon — used by the trustees for their long-range-projections — when the deficit would be 5.8 percent instead of 4.25 percent in 2096.

It is also a shame that after six years, we still have vacancies among the public trustees who oversee the production of the reports. The American public and policymakers require a reasonable assessment of the programs’ financial status and prospects as it is clear that changes will need to be made to both programs sooner rather than later.

Mark J. Warshawsky is a senior fellow at the American Enterprise Institute. He previously served as a senior official at the Social Security Administration and at the Treasury Department.