Is Social Security Running Out?
Patrick Merkel
Is the benefit plan going to go broke before our generation is able to take advantage of it?
Social Security has long been a program that retired Americans rely on for a basic level of monthly income. Created in 1935 by President Franklin Delano Roosevelt, it created provisions for retired Americans to receive about $17.50 per month. Today, that number is up to $3148.00. In 2020, the Social Security Administration distributed over $1 trillion to about 65 million people, and those numbers are only going up. The issue is, the number of people supplying Social Security with funds is a decreasing proportion of the population, and the number of people receiving benefits is an increasing proportion. The groups were 62% and 16% of the total population, respectively, in 2018. Driven by the retiring of the Baby Boom generation, they are projected to be 57% supplying and 23% receiving the funds by 2060. In addition to the number of people collecting benefits, people are collecting them for longer. When FDR created the Social Security Administration (SSA) in 1935, the age for full retirement benefits was 65. The life expectancy was only 63 for women and just 59 for men, meaning most people didn’t even live long enough to claim their benefits. In 2017, the life expectancy for women was 81 and 76 for men, which means that on average today, people claim their benefits for 10-15 years. Because of these reasons, the SSA estimates that reserve funds, not to be confused with immediate funds explained below, will run dry by 2035 if no changes are made.
The Social Security program is funded mainly through two taxes. The first is the Federal Insurance Contributions Act (FICA), which taxes workers’ incomes at 6.2%. Employers match this tax for a total of 12.4%. The second tax is the Self Employed Contributions Act (SECA), which is for those who are self employed. They are taxed the full 12.4% (although many can deduct 6.2% from this as business costs). They are flat taxes and only tax income up to $142,800. These taxes are the immediate funds, received and paid out again, and will not run out so long as FICA and SECA are in effect. The money from these two taxes is paid out to the beneficiaries of the Social Security program on a pay-as-you-go system, meaning money we pay today to the SSA is paid out or invested today. The taxes we pay to Social Security are not stored in an individual account for when we retire. If the SSA collects more money than it pays out, the surplus is invested through the Social Security Trust Fund into US Treasury bonds, earning interest. These bonds have a low yield, but are extremely safe. This trust fund makes up the reserve funds, which are invested to earn a return. In 2019, the Trust Fund brought in over $80 billion in interest on the bonds. Historically, the full interest from the Trust Fund was re-invested in bonds as well.
For many years, the SSA collected more money than it paid out and was able to put the surplus money into the Trust Fund, or the reserve funds. In other words, the immediate funds covered the full cost of the benefits being paid out, and no reserve funds had to be spent. But in 2010, the immediate funds collected were not enough to cover the total cost of the Social Security program. Some of the interest from the Trust Fund had to be used to cover the gap between the income and the expense. While not ideal, this was still a sustainable system, as some of the interest could still be reinvested in bonds, growing the Trust Fund. At the end of 2019, the Trust Fund had reached a high of $2.9 trillion. However, 2020 changed this. This past year, the gap between the money collected and the benefits paid out was too large to bridge with just the interest on the bonds. The SSA had to reach into the Trust Fund, or the reserve funds, to pay for the program, as depicted on the graph where the dashed line is equal to the red area in 2019, signaling an inability of the interest to bridge the gap any longer. This is only sustainable for the next 15 years, at which point the reserve funds will run dry. This does not mean that Social Security will be out of money, but it does mean that the SSA will not be able to cover the scheduled benefits entirely; it is estimated that at that time the SSA will only be able to pay between 76-79% of the scheduled benefits from the FICA and SECA revenue (the blue area of the chart).
This almost happened just one other time in the late 1970’s and early ‘80’s when the Trust Fund dropped to just $24 billion ($64 billion adjusted for inflation). In 1983, Congress reformed the program with changes such as increasing the age at which one can claim full benefits and increasing the percentage of taxes paid to Social Security (raised from 5.4% to the current 6.2%).
The SSA must implement some changes to the program if it is to continue operating at full capacity. While many facets of the program could be altered, there are two changes that stand out. First, the tax ceiling should be increased. Currently, only the first $142,800 of income is taxed for social security, while anything above this level is not taxed. This ceiling is adjusted annually for inflation, but if the ceiling were raised higher than the inflation rate, more payroll taxes would be collected. At the same time, if the tax rate stayed constant, those who are struggling to make ends meet would not be affected; only those who make over $142,000 would be affected. Second, the SSA should slowly raise the age at which full benefits can be claimed. This will be unpopular with the ages that will have to wait an extra year to claim their benefits, but it will provide valuable savings for the Social Security Trust Funds. If implemented correctly, each group of people born in a particular year would only wait one extra year before claiming full benefits. Even if these two changes prove to be insufficient in solving the underlying issues, they will provide the SSA with the time it needs to more effectively reform the system to reliably provide the benefits people depend on for many decades to come. What do you think of these changes? Are there others that could be more beneficial?
https://en.wikipedia.org/wiki/Social_Security_Trust_Fund (Image only)
Works Cited
DeWitt, Larry. “The History And Development Of The Social Security Retirement Earnings Test.” Social
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Epstein, Lita. “How Secure is Social Security?” Investopedia, DotDash, 26 Nov. 2020,
https://www.investopedia.com/articles/personal-finance/120415/how-secure-social-security.asp.
Folger, Jean. “Why Is Social Security Running Out of Money?” Investopedia, DotDash, 15 Oct. 2020,
https://www.investopedia.com/ask/answers/071514/why-social-security-running-out-money.asp.
Markowitz, Andy. “10 Myths and Misconceptions About Social Security.” AARP, AARP, 22 Sept. 2020,
www.aarp.org/retirement/social-security/info-2020/10-myths-explained.html.
Sigalos, MacKenzie. “How Social Security Invests Its Money – and Why It May Run out of Cash Really
Soon.” CNBC, CNBC, 1 Dec. 2020, www.cnbc.com/2020/12/01/why-social-security-may-run-out-of-cash-really-soon.html.
“Trust Fund Operations.” Social Security, Social Security Administration,
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This is a very interesting concept because most of our parents are either close to receiving their social security or coming up for them in the near future. Lots of people count on this when they retire and would be catastrophic if they weren’t able to receive any money. One thing I thought that was interesting that you talked about at the very end was raising the age of Social Security benefits. Although this is a very unpopular opinion and people would be furious about this change it is a potential option to get more money into the fund and then be on track for the future. Great Job!
ReplyDeleteI thought it was interesting that they have never changed the age limit but the expected living age continues to increase. I thought it was interesting that the graph shows that the total cost is finally catching up with what money is part of those benefits. I do agree with your statement that the age dose needs to be increased. If people are going to live longer than it only makes sense to raise the age to receive total benefits. Do you think that raising how much gets taken out would be beneficial?
ReplyDeleteThis was such an interesting post because my mom always tells me that when she was my age she was told she was not going to have any social security benefits and now we are being told the same thing. Your points make sense, however. The number of people paying into the system is decreasing while the number of people receiving benefits is increasing. I agree with your point that the tax ceiling should be raised to bring in more funds and that the age should slowly be increased as to who receives funds. Like you said, this won’t be popular to people who reach that age and have budgeted previously with the expectation of receiving those funds. However, this is an issue that will continue to accumulate if things like this aren’t addressed. As the age expectancy increases the age at which someone can receive funds should increase as well.
ReplyDeleteI loved reading about this topic because of how real it is for our generation. For all of my personal paychecks I see a good chunk going to social security however, whenever I bring it up to my family or other adults they tell me the same thing of, "Well that's good if it's only still around when you are of age." And this article truly showed me how it is becoming less and less of a major concept which is major concerning because How will I be able to get security from my previous paychecks if the system isn't even around anymore? It is definitely a frightening concept as I am constantly losing money for the chance to never see it again already on top of the great amounts of taxes we as Americans have to pay in general.
ReplyDeleteMy dad is always telling us that his generation won't take or get social security in order for my generation to get it. Now i know why he is saying this! Very informative!
ReplyDeleteThis is going to sound weird, but the sooner social security runs out, the better. I say this because if social security runs out when most of the baby boomer generation is retired, then they'll get upset (as they normally do) at the system and demand it be changed to give them money. And any changes made to accommodate the large boomer generation will be plenty big enough to support our generation when we retire.
ReplyDeleteI thought it was very interesting how social security could run out by 2035. Which to me, it doesn't seem like such a bad thing. If we where not taxed this money. People could put more into retirement. Meaning that when we retire. We will have a greater amount of money. Especially if we save and spend our money the right way when younger. Which will result in senior citizens not needing money from the government. So in the end, Social security and the taxation for it takes away more of your income than you get back when you are the proper age for reserving money. I am not at all worried about this.
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