Social Security's Trust Funds Will Run Out of Money in Less Than 10 Years

Funding that Social Security relies on to pay benefits will run out one year earlier than previously projected, according to a new report published Wednesday. In its annual update, the Social Security Board of Trustees said the reserves in two trust funds tapped to supplement a shortfall in revenue will now be depleted in 2034, up from an estimate of 2035 last year.

Without congressional intervention, the trustees’ report calculated the programs will only be able to pay out 81% of benefits once these reserves are depleted in 2034 — a lower estimate than the 83% last year’s report calculated.

That would amount to a significant across-the-board cut for the 74 million Americans who rely on Social Security payments to make ends meet.

What’s going on with Social Security?

The amount of money Social Security takes in from taxes — primarily a 12.4% payroll tax paid half by employers and half by workers — plus interest earned on the reserves isn’t enough to cover the payments the government sends out every month.

To bridge the gap, it uses the reserves in two trust funds: one for Social Security disability benefits and another — much larger and in more precarious financial shape — for the retirement benefits most Americans think of when they hear the phrase “Social Security.”

For reporting purposes, retiree and disability funds are combined, although it would take an act of Congress to formally co-mingle them.

If the two trust funds aren't combined, the picture for older Americans' benefits grows even dimmer. On its own, the trust fund that supplements the money the government takes in from payroll taxes to distribute Social Security’s Old-Age and Survivors Insurance (OASI), as the retirement benefits are officially called, has been paying out more money than it takes in for the past 15 years.

Interest income made up the shortfall for a while, but beginning in 2021, the programs' costs exceeded its income even including interest. As the trust fund balance is drawn down, the amount of interest it earns also falls.

The OASI trust fund reserves are projected to run out by 2033. Although this is the same calendar year as last year, the report noted that the timing has moved earlier in the year than previously projected. After that, the money coming in from payroll tax contributions will only be enough to pay out 77% of benefits.

Why is Social Security running out of money so fast?

The report identified a few factors contributing to the accelerated timeline for the trust funds' insolvency.

The main culprit was the implementation of the Social Security Fairness Act earlier this year. This new law repealed a pair of earlier provisions limiting the amount of Social Security certain workers could collect. The law increased benefits for roughly 3.2 million public-sector workers (along with eligible spouses and surviving spouses) such as teachers, police officers and firefighters, giving them higher monthly payments as well as retroactive lump-sum back payments.

In addition, the report changed its assumption about when the nation’s falling birth rate will recover, bumping that date out by a decade from 2040 to 2050. A falling birth rate means fewer workers in the future, which means a lower level of payroll contributions.

Put simply: The longer the country goes with fewer babies who grow up to pay taxes, the harder it is to pay out Social Security benefits for a growing population of aging baby boomers.

The report also lowered its estimate of what portion of gross domestic product, or GDP, will consist of workers’ earned income in the future. As with the change in the birth rate estimate, this has the practical impact of less money flowing into Social Security from payroll taxes.

Can Social Security's funding problems be fixed?

While lawmakers and consumer advocates alike agree that something needs to be done — and that time is running out to do it — they can’t agree on what, exactly, that something should be.

Upon the report's release, advocates for senior citizens urged lawmakers to rectify the shortfall.

“As America's population ages, the stability of this vital program only becomes more important,” AARP CEO Myechia Minter-Jordan said in a statement Wednesday. “Congress must act to protect and strengthen the Social Security that Americans have earned and paid into throughout their working lives.”

But that’s easier said than done. The nation’s falling birth rate and the looming insolvency of the trust funds have been a reality for years, but actually reforming the program’s finances — especially when it comes to retirement benefits — has proven to be a political third rail.

There are a number of actions lawmakers could take, including raising the retirement age when people can claim benefits, increasing the rate of the payroll tax or applying it to higher incomes.

Currently, annual income above $176,100 is exempt from the payroll taxes. This figure is adjusted slightly every year, but some lawmakers and policy experts say that merely eliminating that cap would cover more than half of the program’s funding shortfall.

On the other hand, President Donald Trump’s pledge to eliminate taxes on Social Security benefits for retirees might have been a winning slogan on the campaign trail, but economics and policy experts say it would only hasten the insolvency crisis. Current taxes on these benefits contribute roughly 4% of the money the trust fund currently takes in; one think tank has warned that eliminating those taxes could shave yet another full year off the projected insolvency date.

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