The ‘Three Scenarios’ of Social Security’s Future
You may have noticed that in the Social Security trustees’ annual report, they don’t give just one possible scenario of the program’s long-term finances, but three: one that assumes what they call “intermediate cost,” another that assumes “low cost,” and a third that assumes “high cost.”
Why is that?
Because the future is unknowable. How long Social Security can pay benefits depends on a number of factors that nobody can predict with any real certainty, like how much payroll tax revenue actually comes in or how many people decide to draw benefits over time.
But elected officials need to have at least some idea of how the program is doing, and using historical data you can make reasonable estimates. So when writing each year’s report, the trustees prepare three “scenarios,” each based on a different set of assumptions regarding inflation, population growth, the economy, and program spending, among other things.
The first and most commonly used scenario uses a set of assumptions that the trustees deem “intermediate cost.” It lies somewhere between the rosier, “low-cost” scenario and its grimmer, “high-cost” counterpart, and it’s what the trustees consider the most realistic sequence of events, given current economic trends. Before COVID hit, the intermediate-cost scenario projected that the Social Security trust funds would run out of money in 2035.
The second scenario uses a “low-cost” set of assumptions. Think of this as the best-case scenario. This estimate assumes that the economy will grow more rapidly, that interest rates will fall more steeply, and that more young workers will pay into the program. As a result, under this scenario, Social Security would be able to pay benefits for a longer period of time, and the trust funds wouldn’t run out of money until 2080.
The final scenario uses a “high-cost” set of assumptions. It assumes a future where program costs rise quickly, economic growth slows down considerably, and revenues fall more than expected. In light of COVID-19, this scenario is especially worth considering, because even before the pandemic hit, this scenario projected the trust funds would run out of money as quickly as 2031.
To dive deeper into precisely what assumptions go into each scenario, you can visit the Social Security Administration’s pages on economic assumptions, other economic factors, and immigration possibilities. The projected trust fund ratios are also worth a visit to learn more.