Social Security outlook points to later trust fund depletion, reform pressure remains

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Social Security trust fund outlook

Highlights

Penn Wharton Budget Model projects Social Security's Old-Age and Survivors Insurance trust fund depletion in February 2033, slightly later than the Social Security trustees' fourth quarter 2032 forecast.
If retirement and disability trust funds are combined, PWBM forecasts depletion in February 2035 compared to the trustees’ third quarter 2034 estimate, with only 86% of benefits payable at exhaustion.
PWBM states stabilizing Social Security requires raising the payroll tax rate from 12.4% to 17.1%, reducing benefits equivalently, or employing a mix, with urgency for near-term reforms.

Funding projections and model differences

As reported by CNBC, a new Penn Wharton Budget Model analysis says Social Security's Old-Age and Survivors Insurance trust fund may be depleted in February 2033, compared with the Social Security trustees' June 9 projection that the fund lasts through the fourth quarter of 2032.

If the retirement and disability trust funds are considered together, PWBM says depletion may be delayed until February 2035. That compares with the trustees' forecast for the combined funds to run out in the third quarter of 2034.

Social Security pays benefits largely through payroll tax revenue and uses trust funds when benefit payments exceed that income. Even if the funds are depleted, the program still receives payroll taxes, though beneficiaries could face reduced payments.

PWBM says 86% of scheduled benefits would be payable once the combined funds are exhausted, falling to 60% by 2100. The trustees estimate 83% would be payable at depletion, declining to 65% by 2100.

Policy implications for retirement finances

PWBM says its earlier solvency estimates had pointed to faster depletion than the trustees' outlook, but that gap has now narrowed and slightly reversed. The report still argues that near-term policy changes are needed to stabilize the system's finances.

Kent Smetters, a Wharton professor and faculty director of PWBM, says the required adjustment remains substantial and grows if action is delayed. According to the report, closing the shortfall would require increasing the current 12.4% payroll tax rate for employees and employers to 17.1%, or making an equivalent reduction in benefits, or using a mix of both.

PWBM says its microsimulation framework differs from the trustees' approach because it starts with individual-level data such as earnings and family structure. By contrast, the trustees begin with assumptions on broader measures including fertility and wage growth to build long-range projections.

In our earlier article on the UK’s review of defined benefit pension transfer rules, we explained how an unusual transaction prompted the government to reassess whether existing safeguards still match today’s market innovation. We noted that officials signaled potential regulatory changes to tighten oversight while preserving flexibility for legitimate pension scheme restructurings.

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