The financial state of Social Security is worse than the government says it is, according to the Wharton School of Business at the University of Pennsylvania.

The situation is direr than the Social Security Trustees estimate because they are not factoring in how the future increase in the national debt reduces the expected growth of the payroll tax base, Wharton school reported in the Penn Wharton Budget Model.

“Using a model that incorporates future macro-economic forces, Penn Wharton projects that the Social Security trust fund depletes in 2032. More importantly, we project much larger future annual cash-flow shortfalls,” the report said. “Relative to the payroll tax base, we project a cash-flow shortfall in 2032 that is 36 percent larger than the Trustees’ estimate for that year. By 2048, our projected cash-flow shortfall is 77 percent larger” than theirs."

The medium and long-term financial condition of Social Security has steadily worsened over time, the report said. If these projections are correct, the Social Security old age and disability programs will be on "a path that is not sustainable,” Penn Wharton said.

Social Security is funded by workers paying for the retirement benefits of existing Social Security beneficiaries. Increases in the national debt reduce the tax base on which Social Security tax is charged because an increase in debt reduces the capital stock, which leads to lower GDP, less work and a shrinking tax base, both for Social Security and general federal revenues, Penn Wharton said. With less investment there is less output and therefore less work and lower wages to tax.

The federal debt could nearly triple as a share of the gross domestic product if Congress makes the Trump tax cut and spending increase permanent, according to the Committee for a Responsible Federal Budget. 

After Social Security was revamped in 1983, it was projected there would be adequate resources to pay benefits through 2058. However, a subsequent faster-than-expected decline in America’s mortality rate and a lower-than-expected fertility rate created more beneficiaries and fewer workers. If the trust fund runs out of money, benefits will have to be cut, the amount of income taxed for Social Security will have to be increased or the retirement age will have to be raised, according to policy analysts.

Many other projections for Social Security’s future do not take into account macro-economic changes into the future, such as growing debt under current national policies, Penn Wharton said. The Social Security Trustees’ projections assume higher economic growth rates for the future than what Penn Wharton feels are warranted, which produces an unrealistic growth rate for the payroll tax base.