Social Security trust funds are expected to run dry in 2034, according to a new report by the agency’s trustees.
The new depletion date is one year sooner than previously estimated and underscores the impending financial dilemma plaguing key safety net programs that currently assist about 70 million Americans each month.
What the report says
The Social Security Board of Trustees report, released Friday, is the latest snapshot of the finances behind Social Security’s benefit programs.
- Social Security benefits largely go to retired workers. Some 50 million Americans collect retirement checks each month, and the average payment is nearly $1,800. The agency also provides assistance to disabled workers and survivors of deceased workers.
- Two separate trust funds support these programs: one for retirement benefits and one for disability benefits. Accounted for separately, the coffer for retirement benefits is now projected to be depleted in 2033, one year sooner than last year’s estimate. The finances for disability benefits are expected to remain stable for the next 75 years.
- Combined, however, the trust funds are expected to run out of money in 2034. Last year, the program had a $22 billion shortfall, the trustees said in the report.
- If Social Security were to become insolvent, the benefit programs would still exist, although benefits would be cut by 20% for it to remain operational.
Insolvency has been looming over Social Security for years, and after each trustee report, doom-and-gloom headlines typically follow. Some experts say that the latest report is nothing to be alarmist about.
- “First of all, a year's worth of fluctuation in the reserve depletion date is not a cause for alarm,” tweeted Kathleen Romig, the director of Social Security and disability policy at the nonprofit Center on Budget and Policy Priorities (CBPP).
- According to the CBPP, Social Security trustees have been projecting a depletion date between 2033 and 2035 for more than a decade.
While the insolvency date is creeping closer, Congress still has 10 years to address the issue, and benefits will continue to be paid out as usual and in full in the meantime.
What’s going on
Funding shortfalls for Social Security have long been anticipated as the nation’s demographics start to shift and the elderly represent a larger portion of the population.
- Social Security benefits are largely funded by payroll taxes, which means a portion of each worker’s paycheck gets redistributed as benefit payments to retired or disabled Americans.
- However, over the past few decades, the worker-to-beneficiary ratio has changed due to lower birthrates and a glut of retiring baby boomers. That leads to Social Security programs paying out more in benefits than the agency is raising through payroll taxes.
- Prior to recent demographic shifts, Social Security coffers were able to accumulate a surplus of tax revenue because there was a more favorable ratio of workers to retirees. That revenue is currently being put to use to address the financial shortfalls but will run dry over the next decade.
In addition to demographic shifts, Social Security’s finances have been rocked by recent economic conditions — especially high levels of inflation.
- Benefits are directly tied to inflation, and they’re recalculated annually as a cost of living adjustment (COLA).
- Soaring inflation last year resulted in a COLA of 8.7%. It was a boon for beneficiaries struggling to keep up with surging consumer costs but a bust for Social Security’s long-term financials.
The report highlights that Congress has clear options to keep the critical safety net programs humming for the next 75 years. One, payroll taxes would need to rise to 15.84% — up from the current 12.4% rate, which is split 50-50 by workers and their employers. Alternatively, benefits would need to be cut by 21.3%. A combination of both could also suffice.
Another option to fund Social Security would be to lift the Social Security “tax cap” that shields income over $160,200 (in 2023) from the payroll taxes that fund the programs.
- In effect, once the maximum $9,932.40 worth of Social Security taxes are deducted from someone’s paycheck, that person is done paying Social Security taxes for 2023. Any subsequent paychecks won't be subject to Social Security taxes.
- Millionaires reached that limit by the end of February, while most Americans continue to pay into Social Security throughout the year.
- A recent estimate from the nonpartisan Congressional Budget Office found that if the tax cap were to be raised to $250,000, it would push back Social Security’s insolvency date to 2046.
Some lawmakers want to eliminate the tax cap altogether. In February, progressive lawmakers introduced the “Social Security Expansion Act” to do just that. Getting rid of the current cap, they say, would fully fund the program — including a proposed enhancement to benefits — for the next 75 years.