Social Security’s Financial Outlook
The potential of a 23-percent cut in Social Security (SS) benefits remains just eight years away, based on data contained in July’s 2025 Social Security Trustees Report, which also shows a “modest increase” in Social Security’s 75-year deficit. But this deficit could be higher if the fertility rate remains low, millions of immigrants are deported and future immigration levels are reduced, and people live longer than expected, according to a new report from the Center for Retirement Research at Boston College (CRR), the goal of which is to put the new SS Trustees’ report in perspective.
CRR begins by noting, “[f]or better or worse, the 2025 Trustees Report is standard fare,” confirming what has been evident for almost three decades – “namely, Social Security is facing a 75-year financing shortfall that currently equals 1.3 percent of GDP.” Accordingly, if no action is taken before 2033, the depletion of reserves in the retirement trust fund will result in an automatic 23-percent cut in benefits for all SS participants, retirees as well as future recipients.
How does this compare to last year’s report? CRR says “the metrics are somewhat worse,” with the projected 75-year deficit rising to 3.82 percent of taxable payroll, compared to 3.50 percent in 2024. Why? As the report explains in more detail:
- The Social Security Fairness Act, repealing the Government Pension Offset (GPO) and the Windfall Elimination provision (WEP), raised benefits for some state and local workers;
- the period of recovery from current low fertility rates was extended by 10 years to 2050;
- the projection period moved forward, which replaces a low-deficit year with a high-deficit year; and
- the share of GDP going to workers was revised downward, which reduces payroll tax revenues.
While the Disability Insurance (DI) trust fund has enough to pay benefits for the full 75-year period, the date of depletion for the combined Old-Age, Survivors, and Disability Insurance (OASDI) trust funds is 2034. “But combining the two systems would require a change in the law; hence, under current law, the action-forcing date is 2033 – eight years from now,” CRR explains.
CRR then examines in more detail the numbers for 2025, using the SS Trustees’ intermediate assumptions. However, this intermediate scenario “is not a sure thing,” CRR warns. Furthermore, the Trustees’ sensitivity analysis for both the economic and demographic assumptions show a high likelihood of the demographic assumptions “breaking to the high-cost side.” Therefore, CRR examines the cost to the program should the fertility rate remain low, should policymakers deport millions of immigrants and reduce future immigration levels, and should people live longer than expected.
CRR breaks this examination into several components, as follows:
THE 2025 REPORT. Overall, using the Trustees’ intermediate assumptions, the cost of the OASDI program rises rapidly from 15.2 percent of taxable payrolls today to 16.6 percent in 2040, from where it “drifts up” to about 19.0 percent in 2080, after which date it “declines slightly.”
This increase in costs, CRR explains, is driven by demographics, “specifically the drop in the total fertility rate after the Baby Boom.” Whereas women of childbearing age in 1964 had an average of 3.2 children, by 1974 that number had dropped to 1.8, CRR stresses. “The combined effects of the retirement of Baby Boomers and a slow-growing labor force due to the decline in fertility reduce the ratio of workers to retirees, which raises costs,” simply put. Thus, this gap between the income and cost rates means that the system is facing a 75-year deficit.
However, this 75-year cash flow deficit is mitigated in the short term by the assets in the trust fund, “which currently equal about two years of benefits,” CRR explains, which it says are the result of annual surpluses due to reforms enacted in 1983. But since 2010, when Social Security’s cost rate started to exceed the income rate, “the government has been tapping the interest on trust fund assets to cover benefits.”
Then, in 2021, when taxes and interest fell short of annual benefits, the government started to draw down trust fund assets. These drawdowns will no longer be possible for OASI in 2033 when the trust fund is depleted.
CRR underscores that it is “crucial to emphasize that the depletion of the trust fund does not mean that OASI has run out of money.” Rather, depletion means payroll tax revenues keep coming in but can only cover 77 percent of currently legislated benefits, declining to 69 percent by the end of the projection period. (If the OASI and DI trust funds were merged, the coverage numbers would be 81 percent, declining to 72 percent.)
What does this mean? In short, several things, depending on how Social Security is being measured.
First, when the trust fund has been depleted, then relying only on current tax revenues will result in Social Security’s “replacement rate” – that is, retirement benefits relative to pre-retirement earnings – for the typical age-65 worker would drop immediately from about 36 percent to about 29 percent.
As far as the long-run deficit for the OASDI program is concerned, this is projected to equal 3.82 percent of covered payroll earnings. However, CRR emphasizes “[t]hat figure means that if payroll taxes were raised immediately by 3.82 percentage points – 1.91 percentage points each for the employee and the employer – the government could pay scheduled benefits through 2099, with a one-year reserve at the end.”
Also, from the perspective of total dollars, Social Security’s financial shortfall over the next 75 years is projected to total $25.1 trillion. However, CRR points out that even though this number appears very large, the economy – and, therefore, taxable payrolls – will also be growing over those 75 years. “Thus, the scary $25.1 trillion can be eliminated – and a one-year reserve created – simply by raising the payroll tax by 3.82 percentage points,” CRR explains, trying to put the number into some perspective.
But what about this shortfall as a percentage of GDP? The cost of the program is projected to rise from about five percent of GDP today to about six percent of GDP as the Baby Boomers retire. CRR says the reason why costs as a percentage of taxable payroll keep rising – while costs as a percentage of GDP more or less stabilize – is that taxable payroll is projected to decline as a share of total compensation due to continued growth in health benefits.
2025 REPORT IN PERSPECTIVE. CRR next notes that the 75-year deficits in the last five Trustees Reports are the largest since 1983 when Congress enacted major legislation to restore balance to SS funding. Therefore, the “main question” to be answered “is why did the deficit grow over the period 1983-2025, and a secondary question is why did it increase since last year’s Report,” CRR suggests.
In response, CRR first points out that Social Security went from a projected 75-year actuarial surplus of 0.02 percent of taxable payroll in the 1983 Trustees Report to a projected deficit of 3.82 percent in 2025. Why?
CRR says that “leading the list of reasons” is advancing the valuation period. That is, each time the valuation period moves out one year, “it picks up a year with a large negative balance.” Consequently, the cumulative effect over the last 42 years has been to increase the 75-year deficit by 2.44 percent of taxable payrolls. “That is, almost two-thirds of the 42-year change in the OASDI deficit is attributable to simply moving the valuation period forward,” CRR stresses.
But CRR also notes that a “worsening of economic assumptions – primarily a decline in assumed productivity growth and the impact of the Great Recession – has also contributed to the rising deficit.” Furthermore, increases in disability rolls have added to this. Finally, CRR stresses that changing demographic assumptions – “most particularly, the reduction in the assumed fertility rate in 2024” – has also contributed to the 42-year change.
The bottom line? “The net effect in 2025 of all these changes is a 75-year deficit equal to 3.82 percent of taxable payrolls,” CRR underscores.
CHANGES FROM LAST YEAR’S REPORT. Following this overview of the 2025 Trustees’ report, and some effort to put the new report in perspective, CRR next specifically examines major changes in the report since last year.
First, as has been pointed out earlier, the deficit of 3.82 percent of taxable payrolls in the 2025 report is somewhat higher than the 3.50 percent in the 2024 report, primarily due to the repeal of GPO and WEP; the valuation period moved forward one year; the projected ratio of labor compensation to GDP was reduced; and the period of low fertility was extended.
In CRR’s view, GPO and WEP “were designed to ensure that state and local workers, who were not covered in their government job but gained minimum coverage through a second job, did not benefit unfairly from the progressivity of Social Security’s benefit formula or from benefits designed for non-working spouses.” While conceding that the GPO and WEP formulas “could have been better designed,” CRR says they “addressed a real equity issue” and eliminating GPO and WEP “not only made the system less fair, but the higher benefits for these state and local workers cost the system money – worsening its financial situation in 2025 by 0.16 percent of taxable payroll.”
As to the change in the valuation period, CRR explains the projection period for the 2025 Report is 2025-2099, compared to 2024-2098 for the previous year. The difference between the cost rate and the income rate in 2024 was -1.34 percent compared to -4.86 percent projected for 2099. Accordingly, CRR calculates that replacing the low-deficit year with a high-deficit year increases the 75-year shortfall by 0.06 percent.
As for the share of GDP going to workers, the ratio of total labor compensation to GDP over the last six complete economic cycles from 1969 to 2019 has averaged 0.62. But the average ratio over the period 2020-2024 has been lower, and the Trustees slightly lowered their projection in 2025, reducing revenues slightly.
Finally, there is the matter of demographics. By extending the time expected to be needed to recover from current low fertility rates by 10 years (from 2040 to 2050) – this “worsened the 75-year deficit by 0.11 percent between 2024 and 2025,” CRR estimates. However, at the same time, CRR says that higher levels of immigration in the period 2022-2025 helped offset this somewhat, resulting in “a modest” net increase in the deficit of 0.02 percent of taxable payrolls.
In the last part of its report, CRR asks “WHERE DO WE GO FROM HERE?”
In summary, as the 2025 Trustees Report shows, Congress has only eight years to act to avoid a 23-percent cut in retirement benefits, CRR stresses. (If the law can be changed so that Social Security’s OASI and DI trust funds are combined, reserves will be adequate to pay full benefits until 2034 – one year longer.)
As CRR has previously noted, one way to keep SS solvent (with a one-year reserve) would be to increase the payroll tax rate 3.82 percentage points immediately. “Alternatively, scheduled benefits would have to be reduced by 22.4 percent or by 26.8 percent if the reduction were applied only to those who become eligible in 2025 or later,” CRR underscores.
However, CRR reminds readers that all these estimates “are based on the Trustees’ intermediate assumptions.” That is, the demographic assumptions that are made, noted above, “look quite optimistic given recent trends and political initiatives,” CRR warns.
The remainder of the CRR paper therefore examines the sensitivity analysis incorporated in the 2025 Report. [Investopedia explains that a “sensitivity analysis” is used to predict how changes in several variables are likely to affect an outcome and is often referred to as a “what-if” or simulation analysis.]
First, CRR looks at the sensitivity of the 75-year deficit to alternative demographic assumptions regarding fertility rates, immigration patterns, and mortality rates. As CRR reminds the reader, these are “the biggest drivers of the cost of Social Security because they determine the number of workers paying into the system relative to beneficiaries collecting from the program.”
Although the Trustees present both high-cost and low-cost alternatives to their baseline assumptions, “the risks appear to be primarily on the pessimistic side – that is, the costs reported in future years are likely to be higher than envisioned in the 2025 Report,” CRR warns.
The report then goes into a somewhat detailed discussion of U.S. fertility rates, which have generally been falling since the end of the Baby Boom in the mid-1960s, CRR says, noting that the decline accelerated after the Great Recession. “Today, the hypothetical lifetime number of births for a woman over her childbearing years is 1.63, well below the level required to hold the population steady,” CRR explains.
“The Social Security Trustees are well aware of these numbers, but project an ultimate fertility rate of 1.9 children,” CRR points out. Why? CRR says the reason is based on repeated surveys of women of childbearing age showing birth expectations above 2.0, “suggesting that the current low levels will not be permanent.” Also, the Trustees believe that increasing fertility rates for women in their 30s support the notion that women are simply postponing their childbearing.
Are the trustees correct, or are they overly optimistic? Most other government agencies disagree with the Trustees, projecting lower fertility rates. Also, the most recent expectations data – which came out after the Trustees set their assumptions for this year’s report – show that women under 35 all expect to have fewer than 2.0 children. “In fact, today’s 20-24-year-olds only expect to have 1.5 children, while 25-29-year-olds expect to have 1.9 children,” CRR reports.
This difference matters. If low fertility persists, CRR explains, the cost of the Social Security program will be higher over the next 75 years than reported in the 2025 report. For example, according to the Trustees’ sensitivity analysis, an ultimate fertility rate of 1.6 rather than 1.9 would increase the 75-year deficit from 3.82 to 4.49 percent of taxable payroll.
But can’t increasing immigration raise the worker-to-retiree ratio and improve the finances of Social Security? Yes, CRR agrees, but “[t]he problem is that we seem to be moving in the wrong direction,” they also observe. CRR then provides a short but information-heavy discussion of estimating net flows for two types of immigrants – lawful permanent residents and those present temporarily or unlawfully. The bottom line as far as the impact of immigration is concerned appears to be that if future immigration flows end up closer to the more pessimistic assumptions, “the 75-year actuarial deficit would look closer to 4.28 percent of taxable payrolls than 3.82 percent” CRR believes. Also, President Trump’s promise to deport 15 to 20 million illegal immigrants currently in the United States would increase the number of beneficiaries per worker, CRR says, and the higher cost rate would further raise the 75-year deficit, and the immediacy of the impact would accelerate the depletion of the trust fund by about a year, CRR estimates.
Finally, what about mortality assumptions? Death rates are generally declining, and the Trustees’ assumption looks at the rate at which the death rate is projected to decline. “If the rate of decline is faster than the intermediate assumption, people will live longer; if it slows down, people will die sooner,” CRR explains.
The Trustees estimate that a higher rate of decline could raise the 75-year deficit from 3.82 to 4.61 percent of taxable payrolls; slower mortality improvement would lower the 75-year deficit to 3.10. In short, the possible range of outcomes for mortality is larger than that for fertility or immigration.
Once again, CRR thinks that the actual outcome regarding mortality could result in a higher rate of mortality improvement than is suggested by the Trustees’ intermediate assumptions. First, CRR notes that comparisons show that the Social Security mortality assumptions result in a slightly lower life expectancy than other government entities. For example, the Census Bureau’s 2023 projections show the assumed mortality rates result in a life expectancy at birth of 83.7 years in 2055. In contrast, the Trustees’ assumptions result in a life expectancy at birth of 82.0 years in 2055.
Also, CRR thinks that comparisons with other developed countries suggest substantial room for a major improvement in U.S. life expectancy. While progress in the U.S. has been slower than its peers in this area, CRR notes that the two historic contributors to this have been deaths linked to smoking and obesity. Smoking has declined, and “[t]o the extent that the new weight loss drugs become widely available, the United States might regain its position among other developed nations,” CRR suggests. “In short, projections of future life expectancy may break to the high side – raising the cost of the Social Security program,” CRR says.
CRR summarizes its review by noting that its report is “not a critique of the Trustees’ assumptions but rather an effort to highlight the uncertainty that surrounds any projections made for the next 75 years and to identify factors that may make the high-cost alternatives more likely than the intermediate estimates.” CRR warns that “[t]hese developments – combined with the annual increase in the deficit as the evaluation period shifts forward – means that Trustees Reports in the next few years may well show 75-year deficits in the range of 4.0 to 4.5 percent.”
CRR concludes that the 2025 Trustees Report confirms what has been evident for almost three decades – namely, Social Security is facing a long-term financing shortfall that equals about one percent of GDP. “The changes required to fix the system are well within the bounds of fluctuations in spending on other programs in the past,” CRR argues.
CRR also says their brief “draws attention to the fact that all the public discussion about Social Security focuses on numbers based on the Trustees’ intermediate assumptions,” but the intermediate scenario “is not a sure thing,” and indeed, “the Trustees present a sensitivity analysis for both the economic and demographic assumptions that “show a high likelihood of breaking to the high-cost side.” Therefore, CRR’s discussion describes the cost to the program should the fertility rate remain low, should policymakers deport millions of immigrants and reduce future immigration levels, and should people live longer than expected.
Nevertheless, CRR stresses there are numerous options “available on both the revenue and benefit sides to close the gap. “All that is needed is the political will,” CRR concludes. [For more discussion about possible Social Security reforms, see the “NCTR FYI” for February 24, 2025, entitled “NIRS Releases Two New Reports on Social Security.”}