In June, the Social Security Trustees delivered their latest annual report, which indicated that the combined Social Security trust funds (OASD and DI) can be expected to run out of money in 2034, given moderate economic 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.” Stockman said it’s more likely Social Security will be bankrupt in 10 years.
The answer may depend on two factors that have become more volatile – immigration and productivity. Keep an eye on these areas because 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 because immigrants tend to be young and hard-working, paying into the system more than they claim in benefits. Over the past 10 years, the U.S. has averaged about 800,000 net legal immigrants and about 200,000 net “other-than-legal” immigrants per year – roughly 1.0 million total.
Social Security projects this will increase to 1.5 million per year through 2020, before leveling off to about 1.3 million over the 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 a shortage of work opportunities. (In 2008, total net immigration fell to just 81,000, the lowest annual rate ever measured.)
Stagnant productivity -- a troubling trend
Stagnant productivity currently is one of the most troubling trends in the U.S. economy. As measured by the Bureau of Economic Analysis (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 into higher wages and more payroll taxes collected. Over the last five economic cycles, going back to 1966, U.S. productivity has increased at an average rate of 1.73% per year.
Productivity gains leaped to well above 2% per year from 1995 to 2005, 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 that aren’t clear.
The Social Security trustees project that productivity will return to its historic mean, about 1.7%, over the long term. You can follow trends in productivity, which the BEA publishes quarterly.
Social Security needs both
Immigration and productivity are alike in that they both drive U.S. economic growth and also reflect the state of the economy. Social Security needs steady growth in both areas, comparable to historic trends, to stay solvent until at least 2034, as the Trustees project.
Strangely, most of the rhetoric in this year’s Presidential election has focused on limiting immigration, and there is very little attention on reviving productivity, or at least understanding why it has turned so anemic.