BEYOND THE NUMBERS
The Social Security trustees will release their annual report on the program’s financial status on Friday, March 31, inevitably followed by alarmist headlines — but don’t be fooled. Although echoed by some policymakers, claims of Social Security’s impending “bankruptcy” are highly misleading and demonstrate misunderstanding, or deliberate misrepresentation, of Social Security’s finances.
Even in the unlikely event that policymakers fail to act, Social Security can pay full benefits for at least another decade, and at least three-quarters of promised benefits after that. Last year’s trustees report projected that the combined Social Security retirement and disability programs could pay full benefits until 2035. Then the program faces a significant, though manageable, long-term funding shortfall — during which Social Security could still pay at least three-quarters of benefits. (See chart.) Because Social Security faces no imminent crisis, policymakers have time to carefully craft a financing package that minimizes cuts to the program’s modest but critical benefits.
As long as workers are paying payroll taxes, Social Security benefits will be paid. That’s because Social Security is a “pay as you go” program — today’s Social Security benefits are funded primarily by the payroll taxes collected from today’s workers. Last year, the system collected over $1 trillion in revenue and paid out about the same in benefits.
For over three decades, in fact, Social Security accumulated a large trust fund reserve, which the program can now draw upon to help pay for benefits. During those years, the system collected more in payroll taxes and other income than it paid in benefits and other expenses. The Treasury invested the surplus in interest-bearing Treasury securities, ultimately reaching a total of $2.9 trillion in trust fund reserves. Social Security began redeeming its reserves to help fund benefits starting in 2021, when its total cost exceeded its total income. The trust fund reserves will make up the difference between income and costs until they are depleted in a decade or so.
Policymakers have broadly committed to shore up Social Security’s finances before the trust funds become depleted. After all, Social Security is an incredibly popular program with deep support from voters and constituents across party lines. But even in the unlikely event that policymakers fail to act in time, benefits would not stop if the trust funds became depleted — contrary to a common misunderstanding. In 2035, if nothing else is done, the program could pay 80 percent of scheduled benefits, mostly out of workers’ ongoing contributions, a figure that would slip to 74 percent in 2096, according to last year’s trustees report.
Although the depletion dates attract media attention, projections are uncertain. For example, while 2035 is the trustees’ best estimate of when the combined trust fund reserves will be depleted, they judge there is an 80 percent probability that the reserves will be depleted sometime between 2032 and 2039. The Congressional Budget Office projects that the trust funds’ reserves would be depleted in 2033.
What remains certain is that Social Security is one of the nation’s most successful, effective, and popular programs. Social Security provides a foundation of income on which workers can build to plan for their retirement, and provides valuable social insurance protection to workers who become disabled and to families whose breadwinner dies. Social Security benefits play a vital role in reducing poverty and lift more people above the poverty line than any other program in the United States. Without Social Security, 21.7 million more people would live below the poverty line, according to our analysis using the March 2022 Current Population Survey.
Policymakers need to act to strengthen Social Security. Social Security will require an increasing share of our nation’s resources as the population ages, and polls show a widespread willingness to pay more to strengthen the program. Social Security’s tax base has eroded since the last time policymakers addressed solvency in 1983, largely due to increased earnings inequality and the rising cost of non-taxed fringe benefits, such as health insurance. Policymakers could also consider other sources of tax revenue, particularly from the wealthiest people in the U.S., for whom earnings are only a small portion of income. Social Security is worth strengthening for future generations.