Social Security’s Financial Outlook: The 2021 Update in Perspective

The 2021 Trustees Report, which typically comes out in the spring, emerged in the last week in August. That’s not surprising given a new Administration and a somewhat more complicated story than usual. Although the Trustees assert that COVID-19 and the ensuing recession had “significant effects” on Social Security’s finances, it is hard to see much of an impact in the report. In the short term, employment, earnings, interest rates, and Gross Domestic Product (GDP) – all of which dropped substantially in 2020 – are expected to return to their pre-COVID levels by 2023, and births delayed in 2020-22 are assumed to be deferred to 2024-26. The increase in deaths due to COVID actually improves the system’s finances. As a result, the depletion date for the trust fund moved up by only one year from 2035 to 2034. For the 75-year projection, given the uncertainty about the long-run impact of COVID, the Trustees assume that the pandemic and recession would have no effect on the 75-year assumptions. The three changes they did make to the ultimate assumptions – raising the total fertility rate, lowering the rate of mortality improvement, and lowering the unemployment rate – all improve the outlook substantially. Yet, the 75-year deficit increased from 3.21 to 3.54 percent of taxable payrolls. The biggest movers were: 1) fewer births than expected in 2020 and recognition that women will continue to delay childbearing; 2) a 1-percent decline in the level of potential GDP due to COVID and the accompanying recession; 3) updates to projections of initial benefits; and 4) moving the valuation period ahead one year. This brief updates the numbers for 2021 and puts the current report in perspective. It also examines the moving pieces in the fertility assumptions and their impact on the 75-year projections and takes a quick look at the cost-of-living adjustment payable in January 2022 and at the projected depletion of the trust fund in 2034. The bottom line is the 75-year deficit has increased, and it is not primarily due to COVID. At the same time, Social Security has once again demonstrated its worth during these tumultuous times, when – in the face of economic collapse – it continued to provide steady income to retirees and those with disabilities. To maintain confidence in this valuable program and avoid precipitous cuts in 2034, Congress needs to address the program’s 75-year deficit.