2.7: A Trust in Social Security

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INTRODUCTION

Social Security is an insurance program. Workers pay into the program, typically through payroll withholding where they work. They can earn up to four credits each year. In 2023, you receive 1 credit for each $1,640 of earnings, up to the maximum of 4 credits per year.²⁶ That money goes into two Social Security trust funds (OASI and DI) where it is used to pay benefits to people currently eligible for them. The money that is not spent remains in the trust funds.

To qualify for Social Security retirement benefits, workers must be at least 62 and have paid into the system for 10 years or more.²⁷
Workers who wait to collect Social Security, up to age 70, will receive higher monthly benefits.
Spouses and ex-spouses may also be eligible for benefits, based on their former partner's earnings record.

SPECIFIC OBJECTIVES

By the end of this collaboration, you should understand that

basic exponential models can be used to investigate complex scenarios that are described in media articles.
predictions based on models are sensitive to initial assumptions.

By the end of this collaboration, you should be able to

investigate when an exponential model will reach a given value.
quantify error in predictive values based on changes in initial assumptions.

PROBLEM SITUATION: THE FUTURE OF SOCIAL SECURITY

The Social Security Trust Funds hold the accumulated savings of the U. S. Social Security system. By law, the funds are invested in the general debt of the United States government, entirely in U.S. Treasury securities.

Projections by the Social Security Board of Trustees (the trustees) show that Social Security expenditures will exceed tax revenues each year through the end of the 75-year valuation period (ending in 2097).

One measure that analysts use to determine the strength of the Social Security Trust Fund finances is the “Trust Fund Ratio.”

\[Trust\;Fund\;Ratio = \dfrac{Trust\;fund\;asset\;reserves\;at\;beginning\;of\;year}{Total\;cost\;of\;running\;Social\;Security\;for\;that\;year} \nonumber\]

For example, in 2010 the asset reserves of the Social Security trust fund were $2.5 trillion and the total cost of the program that year was $706.3 billion, so the Trust Fund Ratio was 354%. Another way of saying this is that the trust fund asset reserves were 3.54 times greater than the cost of the program. The Trust Fund Ratio indicates how much of recipients’ annual benefit amounts could be paid from the balance at the beginning of a given year. When the Trust Fund Ratio drops below 100%, then this means that the fund is unable to pay out the total benefits due.

(1) (a) From 2010 to 2019, the Trust Fund Ratio declined 7.7 percentage points each year. The Trust Fund Ratio in 2010 was 354%. Using 354 as the starting amount, create a linear model and determine in what year the model predicts the Trust Fund Ratio to fall below 100. Your model can be a table, a graph, or an equation.

(b) Use the Trust Fund Ratio information for 2020 and 2022 in the table below to create a linear model and determine in what year the model predicts the Trust Fund Ratio to fall below 100. Round the slope to one decimal place.

Year	Trust Fund Ratio (%)
2020	265
2021	256
2022	234

Comparing our answers from Questions 1a and 1b, we can see that using more recent data (2020 to 2022) suggests that the Trust Fund Ratio will be depleted sooner than what the 2010 to 2019 data suggested.

It is projected that in 2023, the Trust Fund Ratio will be anywhere between 204% to 219%. Furthermore, some projections suggest that the funds will drop below 100 (96%) in 2029, which means that full payments to retirees cannot be met, and then it will drop to zero (trust fund asset reserve depletion) around 2034.²⁸

$Graph showing that the OASI fund is projected to drop to 0 around the year 2033, and the combined OASI and DI fund to drop to zero around 2034.$

Let’s now explore what projected trust fund asset reserves suggest about when the fund will be unable to meet its benefit pay out obligations. The Congressional Research Service stated that at the end of 2022, the trust fund asset reserves were valued at around $2.83 trillion.²⁹ Using projection figures from the 2023 Annual Report of the Board of Trustees for the OASI and DI funds for 2023 and onward, we can estimate that the asset reserves of the Social Security trust fund is going to decline about 15% each year (as a result of paying out more than is being brought in).

(2) (a) Assume the 15% yearly decline estimates are correct, and create a model for the yearly value of the trust fund asset reserves after 2.83 trillion dollars was reached in 2022. Your model can be a table, a graph, or an equation.

(b) How much will the trust funds decrease in the first year after 2022?

(c) How long will it take for the value of the trust funds to decline to half of $2.83 trillion? In what year will that occur?

(3) Using projection data, when the trust fund drops below 400 billion dollars there will not be enough money to cover the benefits due to retirees. Use your Trust Funds Model from Question 2 to find when this will occur.

(4) (a) If additional funds are added to the Trust Funds as a result of policy changes, so that the value of the funds in 2022 is $5 trillion, how long would it take for the value of the funds to shrink to half?

(b) With a fund value of $5 trillion in 2022, when would these funds drop below 400 billion dollars?

(5) What amount of money is needed in the trust funds in 2022 so that the value will not drop below 400 billion dollars until 2042? You can create an equation to model this scenario with a variable for the unknown starting amount (in trillions), and using a repeated 15% decrease for 20 years. This equation is:

\[0.4 = M(0.85)^{20}\nonumber\]

Solve the equation. What is the starting amount, M?

(6) What are some important factors that might contribute to the decline that is projected in the value of the Social Security Trust Funds?

(7) What could be done to address the problem of the decline in the value of the Trust Fund?

(8) Some assumptions were made in order to produce the Trust Funds Model in Question 2. These assumptions are based on predictions of a future some years off, and could be somewhat inaccurate. However, they are still the best assumptions that could be made at the time and are much better than random guesses. Make a list of these assumptions.