The Trouble with Social Security: Will it Last?

Thursday - June 8 2023, 04:07 UTC - 1 year ago

Social Security is in trouble, running a cash-flow deficit since 2010. Its trust fund, which holds US$2.7 trillion, is rapidly diminishing and is projected to be completely depleted by 2033. Under current law, when that trust fund is empty, Social Security can pay benefits only from dedicated tax revenues covering only 77% of promised benefits. The trust fund was created from IOUs from the Treasury Department for the extra money collected since 1984 and the current wave of baby boomer retirements is causing additional financial strain.

Social Security is in trouble.

The retirement and disability program has been running a cash-flow deficit since 2010. Its trust fund, which holds US$2.7 trillion, is rapidly diminishing. Social Security’s trustees, a group that includes the secretaries of the departments of Treasury, Labor, and Health and Human Services, as well as the Social Security commissioner, project that the trust fund will be completely drained by 2033.

Under current law, when that trust fund is empty, Social Security can pay benefits only from dedicated tax revenues, which would by that point cover about 77% of promised benefits. Another way to say this is that when the trust fund is depleted, under current law, Social Security beneficiaries would see a sudden 23% cut in their monthly checks in 2034.

As economists who study the Medicare and Social Security programs, we view the above scenario as politically unacceptable. Such a sudden and dramatic benefit cut would anger a lot of voters. Unfortunately, the actions necessary now to avoid it – like raising taxes or cutting benefits – aren’t getting serious consideration today. But we believe there are strategies that could work.Where the money for benefits comes from .

Roughly 67 million Americans, most of whom are 65 or older, receive Social Security benefits. The agency disburses more than $1 trillion annually. It’s the government’s largest single expenditure, constituting nearly 20% of the total federal budget.

Social Security is funded by a payroll tax of 12.4% on wages split equally between workers and employers. Self-employed people pay the entire 12.4%. This payroll tax applies to earnings up to $160,200 as of 2023. The government increases this cap annually based on increases in the National Average Wage Index – a measure that combines wage growth and inflation. The program also receives about 4% of its revenue from a tax on Social Security benefits, though not everyone who receives them has to pay this tax.

Social Security tax revenue stayed relatively flat after 1990. But the costs of the program rose sharply in 2010, in part because of early retirements in response to the Great Recession.

Social Security spending has recently been growing more rapidly because of a wave of baby boomer retirements, which added to a decline in the number of workers per retiree.

Costs of the program are expected to further exceed the money that’s coming in, which will continue to drain the trust fund, according to the program’s trustees.

Barring immediate action by the government, the trust fund’s exhaustion is only a little more than a decade away. And yet few members of Congress seem willing to do something about it. For example, Social Security reform was not even on the table during the 2023 negotiations over the debt ceiling and spending cuts.

Trust fund .

Where did the trust fund, which helps cover the program’s costs, come from? .

While the Social Security program was collecting surpluses from 1984 to 2009, that extra money funded other spending – keeping other taxes lower than they would have been otherwise and partially covering the budget deficit.

During Social Security’s years of surpus, the Treasury Department issued IOUs for what it had spent. These IOUs became the basis of the Social Security trust fund. In effect, the US government borrowed from Social Security in order to keep taxes low and to reduce the deficit.