Facts and Myths About the Future of Social Security

Social Security is one of the most well-known government programs in the U.S., yet many Americans don’t fully understand how Social Security benefits work. Part of this confusion comes from the half-truths and misleading statistics tossed about in the financial press.

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The reality is that while changes are definitely coming to Social Security, it’s not vanishing in the immediate future, as many alarming news stories may suggest. Here’s a look at the facts and myths surrounding the future of Social Security so that you can make sound financial decisions based on accurate information.

Social Security isn’t some benevolent gift that comes from the coffers of the U.S. Treasury. Rather, American taxpayers fund the program via federal payroll taxes commonly referred to as FICA, for the Federal Insurance Contributions Act. From these payroll taxes, the Social Security Administration makes distributions to qualifying recipients. While Social Security revenues have long exceeded expenses, that changed in 2021. Projections now forecast that ongoing expenses will remain higher than revenues for the foreseeable future.

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Since expenses now exceed revenues in the Social Security program, some pundits have referred to it as “insolvent.” The reality is that current payroll taxes are not the only source of income for Social Security payouts. Over the decades that Social Security has been operational, the Social Security Administration has built up a trust fund to help supplement payments. Although this fund is rapidly depleting, it’s expected to last until 2034. This means that Social Security should remain fully funded for at least another 12 years.

For those looking to retire in 2034 or later, the fact that the Social Security Trust Fund will be depleted by then certainly isn’t good news. However, this doesn’t mean that Social Security is “going broke.” Although the Trust Fund is anticipated to be depleted in that year, the bulk of Social Security funding still comes from the payroll tax on current workers. That tax will continue to generate significant revenue for the program that will be used to pay benefits for retirees, even in 2034.

Currently, reserves in the Social Security Trust Fund are more than adequate, at 253% of annual costs. However, the deficit in payroll taxes that supplement the Trust Fund is so large that these excess reserves are being rapidly depleted. By 2030, reserves will only amount to 85% of annual costs. As this deficit will arrive in less than 10 years, it fails the Social Security Trustees’ test of short-range financial adequacy. This is essentially a warning flag that changes need to be made to keep the program funded.

The Social Security Trustees are constantly evaluating the long-term sustainability of the program. In recent years, projections for when the Trust Fund reserves will run out have shortened. Part of the reason for this has been the effect of the coronavirus. Throughout the pandemic, Social Security recipients continued to draw their benefits while the number of workers paying into the system shrank. As Social Security is a delicate balancing act between revenues and expenses, changes in short-term cash flows can and will continue to modify the projected reserve depletion date.

Just as Social Security isn’t “going broke” in 2034, it’s also not going away. As long as American workers continue to pay into the program via the payroll tax, Social Security will remain viable. Benefits as currently projected will certainly be cut if nothing is done to change the system, but it’s highly unlikely that Congress will simply do nothing over the next 12 years and let American retirees suffer. The specifics of Social Security are likely to undergo large changes over the next decade or so, but there is no truth to the myth that Social Security will simply end entirely in 2034.

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Price indexing is a complex method that has been proposed to reduce future expenditures and help keep the Social Security program fully solvent. Currently, initial Social Security benefits are wage-indexed, meaning higher earnings translate to higher benefits. Various proposals to institute a price-indexed system instead would reduce program expenses. The details are cumbersome, but essentially, benefits for higher-paid workers would be reduced on a relative basis compared with lower-income taxpayers. This would dramatically help the projected shortfall in the Social Security Trust Fund.

When it comes to governmental programs, Social Security is something of a “sacred cow.” The idea of reducing benefits is unpopular enough with the electorate, but if the government were to actually raid Social Security to pay for other programs, it would be political suicide for anyone involved. The origin of the myth that the government uses Social Security to fund other programs likely comes from the fact that the Social Security Trust Fund is invested in U.S. Treasury securities. The government uses the proceeds from these purchases to fund a multitude of general expenses, but it always pays back what it borrows, with interest, just as it would to any other investor.

It’s an accepted fact that as things currently stand, the Social Security Trust Fund will be depleted by 2034. But that doesn’t mean that Social Security recipients will be left high and dry in 2034. Rather, it simply means that payouts will have to be funded solely with payroll tax revenue, rather than any reserves in the Social Security Trust Fund. In dollars and cents, that means the average Social Security recipient should only expect to receive 78% of their projected payout in 2034 unless changes to the program are implemented.

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