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The solvency of the Social Security program continues to be an important question to be
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asked, one that is at the forefront of many Americans' minds. The latest reports coming
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out show that the system will deplete in early 2033, according to the Penn Wharton budget model.
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That counters a report by the Social Security trustees that projects depletion in the fourth
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quarter of 2032. Ken Smetter is his faculty director of the Penn Wharton budget model,
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and he joins us to go over their latest reporting on this topic. Ken, great to see you again. How
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are you, sir? Good. How about you, Dan? Great to have you with us. So it seems like we continue
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to inch slowly towards this depletion that could occur in the next several years,
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unless Congress does something about this, correct? Yeah, absolutely. It's true that
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we're a little more optimistic than the trustees, but only by a couple of months. And so,
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if you go back five years ago, everything was reversed. They worked several years out more
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than us. They were much more optimistic than us, and they brought their trust fund depletion date
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down. So we're only talking about, you know, a pretty short time period from now, you know,
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six, seven years before the trust fund, the main program, the OASI program, what most people call
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Social Security, is depleted. So what's the difference between the data brought out by the
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trustees and the data that Penn Wharton budget model has put together? Yeah, so our approaches
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are very different. They tend to take what's called a top-down approach, where they start
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with these aggregate numbers, and they do a fair amount of, you know, straight line projections and
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other sort of projections out from that. You know, they create some nuance there, but it's mostly
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aggregate protected for it. We're just the opposite. We're very bottom up. So we start
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with hundreds of thousands of different represent households, and we build our way up. But in this
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case, you know, for this year, finally, we're pretty much converging on a very similar outcome,
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at least in the short run. We're roughly around the same point of time in six, seven years in
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terms of trust fund depletion, and also cut in benefits at that point, if depletion were to
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happen. So when you talk about a topic like this, how much does what the birth rate will be in the
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future for Americans, as well as the longevity of life as well, how much will those two components
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play a factor? In the long run, definitely those are very, very important. And so neither of them
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are going to affect much for the trust fund depletion date. That's going to happen, you know,
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regardless if we get our birth rate up or it continues to fall. Over time, it definitely
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matters a lot. So where we differ with the trustees is that we believe that the, we've been actually
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projecting for a while that birth rates will continue to fall. And it will, you know, we've,
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we projected, you know, almost eight, nine years ago that we would join the European club of failing
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to replace ourselves. And so we, you know, do say it will level out, whereas the trustees,
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they're actually projecting on birth rates that they're actually going to bounce back.
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And so we have a different view on that. On the other hand, with longevity, they actually are
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straight lining a lot of their longevity over time. And so whereas, so they're actually more
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optimistic that people are going to live longer than we are. And that's actually more costly for
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the trust fund. So what happens is that you actually have these two offsetting, you know,
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effects. We were more optimistic in terms of, in terms of costs associated with longevity,
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that it's more pessimistic about longevity for us, you know, as people, but in terms of costs for the
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social security that we're saying people aren't going to live as long on average. So that's a
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little bit more optimistic for the finances, but we're a little bit more pessimistic when it comes
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to the fertility rates and that they're going to continue to fall. And as a result of that,
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you know, you can have fewer parents into this pay-as-you-go system. What then in the short term are the most addressable ways to look at securing the safety
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of social security beyond that window of late 2032 or early 2033? Right. And it really comes down to,
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I think, two tranches of policy that policymakers are going to have to grapple with. One is that
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the fund, the trust fund, the social security system needs money in the short run. And you're
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not going to get that simply by reducing benefits and controlling the growth for the benefits.
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So some form of additional funds in the short run, and that could take the form of maybe some
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adjustment to the payroll tax ceiling that could take a completely outside the system
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approach of infusion into the trust fund. There's lots of different approaches that could take
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some are more damaging than others to the economy. But over a longer period of time,
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the real bang for buck comes from basically saying, you know what, we can't necessarily
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continue to afford having benefits being paid out at even age 67. It sounds like it's a long age,
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but not. It's already 50 years from now when people are living a lot longer than that.
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Right. And I guess that extends that discussion of whether or not retirement should be pushed out to 72 as well. Correct?
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Sure. And that would, you know, going from 67 as the normal retirement age to 70 and then even a
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72, you know, that might sound, wow, that's a long time, but that's for us today. But, you know,
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50 years from now, that is going to look very different. And a lot of that is a very open
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question. For example, do the GLP-1 drugs, you know, especially if you take them during working
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age, that's where life extension seems to be most prominent. You know, how much are those
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going to be adopted by the populations in other life extending, you know, drugs and procedures
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and lifestyle changes. And so I think, you know, a lot of that is still very open,
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but there's no question people are going to be living longer in the future. This has been an issue that has been, it seems like, continuously a version of kicking the can
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down the road. So as we get closer to that late 2032, early 23 timeframe, does kicking the can
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down the road amplify the issues that are involved and make it even harder to continue to
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secure this system in the right manner for a longer period of time? It certainly does. The longer you wait, the less you plan, the larger the changes have to be at
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that point, whether that's increasing revenue in the form of tax increases or decrease of benefits.
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And so getting some action today is important for a couple of reasons. One is that you can
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smooth out some of the costs over time. And the second is that you give people time to prepare,
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especially, no one's going to really think about cutting benefits in the short run that, you know,
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anybody's above age 50 or something like that. But you still want to give, you know, the 20,
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30, 40-year-old some time to prepare in terms of saving for retirement. And some of that could
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actually be, you know, helping Social Security with some type of, you know, other accounts that
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people can put money into to augment their saving and, you know, making that easier to get done.
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But giving younger people time to prepare for possible benefit changes in 20, 30, or 40 years
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would be very useful. Right. And so for those people watching or listening to this interview,
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if that does happen, worst-case scenario, then financially what occurs? Yeah. So in about six,
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seven years, you know, what happens is that when the trust fund depletes, they might be able to
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get another six months to a year from borrowing from another trust fund known as the disability
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trust fund. But that does, you know, left-hand borrow from the right hand. But when the trust
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fund depletes, basically it means an immediate cut in benefits by about 14% across the board.
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So only about 86% of the benefits will be payable at that point in about six, seven years. And so
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that benefit cut about 14% that happens, that's not just for new people coming into the Social
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Security system. If your grandma's 90 years old, she's getting a benefit 14% smaller at that point.
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And so, and by the way, that only gets worse over time by, you know, by 2100, then the 75 years,
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the payable benefits is only about 60% of what the current system is promising. And so
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the system definitely needs some type of fixing, whether it's more revenue or less benefits that
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are going to be paid, especially if policymakers do start to lean a bit more on increasing the
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retirement age. Kent, always great to get your insight on these topics. Greatly appreciate it.
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All the best. My pleasure. Kent Smetters, who is faculty director of the Penn Wharton budget model.
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By the way, you can see their work and their research by going to their website,
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which is budgetmodel.wharton.upenn.edu.