Social Security benefits are financed mostly by payroll taxes levied on current workers. Shortfalls are financed through a Trust Fund, the balance of which shrinks when total costs (benefits plus administrative expenses) exceed total revenues (payroll and income taxes plus interest earnings on accumulated reserves). The differential between costs and revenues is linked directly to the ratio of workers paying payroll taxes to beneficiaries, and thus linked to U.S. demography.
At the end of 2015, the Old Age and Survivors Insurance (OASI) Trust Fund held $2.78 trillion, about 3.7 times annual OASI benefits. Since 2011, OASI Trust Fund reserves have risen in value but declined as a multiple of program costs. Reserves are projected to be depleted in 2035.
The first chart, below, shows historical and projected ratios of “covered workers” — those who pay Social Security payroll taxes — to beneficiaries of the OASI program. The number of beneficiaries is projected to grow faster than the number of workers; as a result, this ratio is projected to decline. As of 2015, there are 3.5 covered workers for every OASI beneficiary. That ratio is projected to drop to 2.5 by 2035.
The current and projected increase in the number of OASI beneficiaries is traceable largely to the anticipated retirement of the baby boom generation. The chart below shows the total fertility rate —the number of children each woman is projected to bear over her lifetime, given the birth rates observed in each year. The fertility rate rose sharply in the two decades after World War II and then fell. The children born during the high-birth-rate years, known as the baby boom, are just now reaching retirement age.
The working age population—those aged 20 to 65—must support both the elderly and the young, as well as people with disabilities and those who choose not to or are unable to work. The next chart shows the dependency ratio, defined as the ratio of those over age 65 and under 20 to the working age population. This ratio rose sharply during the years when birth rates were high, fell as the baby-boomers matured, and will rise once again as they retire.
Rising life expectancies lengthen the period over which retirees may receive benefits, thereby adding to the numbers of beneficiaries alive at each moment. Life expectancy at age 65 has risen steadily and is projected to continue doing so. Men turning 65 today are expected to live for 18.1 more years; by 2050 65-year-old men are expected to live for 20.5 additional years. For women, life expectancy at age 65 is projected to increase from 20.6 years today to 22.7 years in 2050.
The size of the labor force depends not only on births but also on net immigration. Immigrants typically enter the country as working age adults, paying payroll taxes soon after entry but not claiming benefits until much later. Net immigration varies widely from year to year, as flows depend sensitively on public policy and economic conditions. On balance, however, the flow has increased over time. Current projections assume that net inflows will level off.