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Why Did Social Security’s Deficit Increase?

Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly contributor to “Encore.

Social Security’s 2012 Trustees Report shows a significant increase in the program’s 75-year deficit from 2.22 percent to 2.67 percent of taxable payroll and an advance in the date of trust fund exhaustion from 2036 to 2033.  Why did the deficit increase? What are the implications?

The increase in the deficit primarily reflects three developments: 1) moving the valuation period ahead one year; 2) recalibrating 2012 demographic and economic variables to reflect the impact of the slow recovery from the recession; and 3) changing two sets of long-run assumptions.  The table summarizes the changes.

Table. Reasons for Change in Social Security’s Actuarial Balance in 2012

Item Impact of deficit
Valuation period -0.05
Updated starting values

  • Birth rates, immigration, and population lower than expected
  • Benefits higher than expected and payroll taxes lower
  • Lower real interest rates for the first 10 years
Changed long-term assumptions

  • Lowered ultimate economic assumption on annual rate of change in hours worked
  • Raised ultimate assumption of disability incidence
Methods and programmatic data -0.08
Total change in actuarial balance -0.44

Source: Author’s calculations from 2012 Social Security Trustees Report.

Social Security’s deficit automatically increases each year by about 0.05 percent as the valuation period changes.  That is, the 2011 Report looked at the system’s finances over the period 2011-2085; the projection period for the 2012 Report is 2012-2086.  Each time the valuation moves out a year, it picks up a year with a large negative balance, which increases the 75-year deficit.

The weak economy also required the Trustees to update some demographic and economic factors that have been adversely affected by the economy.  On the demographic side, birth rates, legal immigration, and starting population all turned out to be lower than expected, so the Trustees updated the 2012 values and the way these starting values transitioned to the ultimate assumptions.  On the economic side, they also updated starting values for benefit levels, which were higher than expected because of the 2011 cost-of-living adjustment, and for payroll taxes, which were lower than expected because of the weak economy.

In terms of changes to long-run assumptions, the Trustees made changes in two areas.  First, on the economic front, the Trustees lowered the ultimate assumption regarding the rate of change in hours worked to better reflect the habits of an aging workforce and a projected increase in the demand for leisure as living standards rise.  Second, in terms of the disability program, the Trustees increased the ultimate assumption about incidence of disability to better reflect the increasing trend of the last 10 years.  Finally, methodological changes also increased the actuarial deficit.

While the deficit is larger and the date of exhaustion nearer, the story remains the same.  The program faces a manageable financing shortfall over the next 75 years, which should be addressed soon to restore confidence in the nation’s major retirement program and to give people time to adjust to needed changes.


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    • Wife and I retired at age 50, now both age 52 and teolirarmpy living in Arizona SF rental, after selling our paid off home 2 1/2 yrs ago.Both receive total of appx 90k per annum in corporate pensions with excellent, (virtually no cost), health and dental plan. Liquid assets of slightly more than $2 mil, actually cash with no tax liability, bringing income, along with our part-time mickey-mouse fun jobs, at almost 225k per year. Also own a debt free small mixed use building in the Chelsea neighborhood of Manhattan, where I spent first 40 years of my life.Social Security never was a factor in our retirement plans, but if we live long enough, will take it at 62.Spent over a year traveling overseas and USA extensively to finalize a new home base/retirement spot. Florida,Carolinas,Hawaii,New Mexico and few other warm spots were explored in detail,and decided no way. California which we know well, still has appeal in certain parts (SoCal). Probably can swing something in our favorite spot, town of Rancho Santa Fe, (north San Diego),if motivated enough but would pin us down in one house with maybe a 500k mortgage and other high carrying costs which is counter to my “pay cash for everything” lifestyle. Was thinking a two-home solution for retirement would maybe work for us by paying about 500k cash for each, and shuttling between two locations. Not quite sure yet, still want to visit the other half of the world and the last 5 US states that are on my list.Living overseas is starting to sound better and better.

    • Can these columns PLEASE be set up that when you try to print you do NOT get 4 pages of garbage and NO ARTICLE? :(

    • If the economy grows at 3 percent than social security is self funding.

    • What effect did the holiday withholding reduction have on bringing on the effects to the soundness of SS?

    • What….no impact from the payroll tax holiday given by the commander in Chief?

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.