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Key Takeaways
- Social Security’s trust fund is projected to run out of reserves by 2033, at which point retirees may only receive 77% of their benefits.
- The decline in U.S. fertility rates—1.6 births per woman in 2023—means fewer workers are paying into the system that funds today’s retirees.
- While congressional action is needed to prevent trust fund depletion by 2033, the long-term financial health of Social Security is largely dependent on factors like birth rates.
While Social Security benefits are an essential source of income for many retirees, future beneficiaries could receive smaller benefits in the future, due in part to falling birth rates.
Starting in 2033, the Old-Age and Survivors Insurance (OASI) trust fund, which pays out Social Security benefits to retirees and survivors, is expected to run out of surplus funds, resulting in beneficiaries receiving only a portion (77%) of their expected benefits. The costs of the program are expected to rise over the long term as well because of these demographic changes.
“Social Security operates essentially as a pay-as-you-go operation,” said Alicia Munnell, a Senior Adviser at the Center for Retirement Research (CRR) at Boston College. “The cost of the system depends on how many workers there are compared to how many retirees, and when you have a big decline in that ratio, it makes it much more expensive.”
Why Birth Rates Matter
While fertility rates in the U.S. rose significantly during the baby-boom era, they’ve plummeted since then, settling around 1.6 births per woman in 2023. In comparison, there were 3.68 births per woman in 1957.
“Since the baby-boom era (1946-65), women have had higher educational attainment, higher labor force participation, an older average age at first marriage, and a higher propensity to be unmarried,” the most recent Social Security Trustees Report states. “All of these factors are consistent with continued lower total fertility rates than those experienced during the baby-boom era.”
The low birth rate is an issue for Social Security because it’s funded through payroll taxes, a portion of which is typically paid by the worker. The taxes paid by current workers fund benefits for current beneficiaries, so if there are too many beneficiaries and too few workers, there might not be enough money to fully fund benefits.
When Could Cuts Begin?
When the taxes collected by the Social Security Administration don’t cover the cost of benefits, the government starts relying on its trust fund, which is invested in Treasury securities. The government started doing this in 2021. It also draws on interest generated by the trust fund.
Yet when the government completely draws down the trust fund in 2033, it will provide only a fraction (77% to be exact) of full benefits to OASI recipients.
And if the fertility rate remains at 1.6 births per woman, it could impact the long-term health of the program, too. According to a recent CRR report by Munnell, a lower fertility rate (1.6 births per woman) means a larger long-term deficit for the program compared with higher fertility rates.
Long-Term Projections
The Social Security Administration estimates that U.S. fertility rates will rise in the coming decades (though the program will still have a long-term deficit despite this increase), rising to 1.9 in 2050. This is because they expect women to wait until they’re older to have children.
“The Trustees continue to assume that recent low rates of period fertility are, in part, indicative of a gradual shift to older ages of childbearing for younger birth cohorts,” the report states.
Yet Munnell is still skeptical that fertility rates in the U.S. will budge upward in the coming decades.
“You look at countries like Sweden, where they do everything to make it easy in terms of the amount of time off [for parents] and support for taking care of the child. Their fertility rate is below ours,” said Munnell. “There’s just a lot of trends that have culminated in this much lower [fertility] rate. A lot of it has to do with women having options which they didn’t have in the past.”
The Bottom Line
Ultimately, the short- and long-run financial health of Social Security depends on the delicate balance of workers and beneficiaries. When Americans have fewer children, the ratio of workers to beneficiaries declines, and the costs of the program rise.
In the short term, the OASI trust fund will run out in 2033, unless Congress passes legislation to fix the funding shortfall. Yet even with a small projected increase in birth rates by 2050, the program will continue to run a long-term deficit.
