In June, the SocialSecurity Trustees delivered their latest annual report, whichindicated that the combined Social Security trust funds (OASD andDI) can be expected to run out of money in 2034, given moderateeconomic assumptions.

This was followed by scathing criticism from several pundits,most notably former Treasury U.S. Budget Director David Stockman,who called the Trustees’ report “funny money accounting.” Stockmansaid it’s more likely Social Security will be bankrupt in 10years.

Who’s right?

The answer may depend on two factors that have become morevolatile – immigration and productivity. Keep an eye on these areasbecause they could have big impact on both Social Security and the overall U.S. economy.They also could be key to your clients’ long-term financial security.

Immigration -- a postive factor for Social Security

Immigration is a positive factor for Social Security becauseimmigrants tend to be young and hard-working, paying into thesystem more than they claim in benefits. Over the past 10years, the U.S. has averaged about 800,000 net legal immigrants andabout 200,000 net “other-than-legal” immigrants per year – roughly1.0 million total.

Social Security projects this will increase to 1.5 million peryear through 2020, before leveling off to about 1.3 million overthe longer term.

However, if the political climate shifts against immigration,the effect on the Social Security trust funds would be negative.Another U.S. recession also could dampen immigration due to ashortage of work opportunities. (In 2008, total net immigrationfell to just 81,000, the lowest annual rate ever measured.)

Stagnant productivity -- a troubling trend

Stagnant productivity currently is one of the most troublingtrends in the U.S. economy. As measured by the Bureau of EconomicAnalysis (BEA), productivity is defined as the ratio of real U.S.GDP to hours worked by all workers.

For Social Security, increases in productivity translate intohigher wages and more payroll taxes collected. Over the last fiveeconomic cycles, going back to 1966, U.S. productivity hasincreased at an average rate of 1.73% per year.

Productivity gains leaped to well above 2% per year from 1995 to2005, thanks mainly to the Internet and other new technologies.However, productivity has been sluggish since 2011 and totally flat(0% productivity gains) over the past two years, for reasons thataren’t clear.

The Social Security trustees project that productivity willreturn to its historic mean, about 1.7%, over the long term. Youcan follow trends in productivity, which the BEA publishesquarterly.

Social Security needs both

Immigration and productivity are alike in that they both driveU.S. economic growth and also reflect the state of the economy.Social Security needs steady growth in both areas, comparable tohistoric trends, to stay solvent until at least 2034, as theTrustees project.

Strangely, most of the rhetoric in this year’s Presidentialelection has focused on limiting immigration, and there is verylittle attention on reviving productivity, or at leastunderstanding why it has turned so anemic.