5 Facts About Social Security’s Solvency

Social Security’s future is not secure. The program is running out of time and money, recent increases in government spending and debt have crowded out options for reform, and Americans young and old stand to lose from Congress’s continued inaction.  

  1. Social Security will be insolvent within 10 years. The Social Security Trustees project that Social Security’s Old Age and Survivor’s Insurance (OASI) program will run out of funds to pay scheduled benefits beginning in 2033. The Congressional Budget Office (CBO) projects that the OASI program will reach insolvency one year earlier, in 2032.

    Insolvency means that Social Security’s trust fund has run out of money and the program is only able to pay out as much in benefits as it collects in taxes. Social Security has actually been running annual deficits – meaning it has paid out more in benefits to retirees than it has collected in payroll taxes from workers – for 13 years, since 2011. The reason the program can continue to pay 100 percent of scheduled benefits despite annual shortfalls is that Social Security has a trust fund made up of workers’ payroll tax contributions that they paid in advance of receiving benefits. (The trust fund also includes interest owed to it by the federal government because the federal government has consistently “borrowed” from Social Security’s trust fund – instead of issuing new publicly held debt – to finance other government spending).

    The reason Social Security’s trust fund is running out of money is that the program paid out more in benefits than it collected in tax revenues for multiple generations of workers and retirees.

  2. Generation X and younger are on track to receive less than 77 percent of scheduled benefits. Once Social Security’s trust fund runs dry, the Social Security Trustees project that the program will be able to pay 77 percent of scheduled benefits, and CBO projects that it will be able to pay only 75 percent of scheduled benefits. For the average Social Security beneficiary, this would equal a loss of between $4,900 and $5,300 from their current $21,100 in annual Social Security benefits.

    The oldest members of Generation X (those born in 1965) will reach Social Security’s full retirement age of 67 in 2032, when CBO projects the program will become insolvent. Consequently, all of Generation X, Millennials, Generation Z, and the new Generation Alpha are on track not to receive a single full retirement benefit. Both the Social Security Trustees and CBO project that younger generations will receive increasingly larger benefit reductions under current law. The sooner that Congress acts to protect Social Security, the smaller the consequences will be for current and future generations.

  3. Trying to fix Social Security by raising taxes to maintain scheduled benefits would require large tax hikes. Social Security began as a 2 percent payroll tax, and the program originally promised that it would never take more than 6 percent of workers’ paychecks. Today, Social Security’s payroll tax stands at 12.4 percent, and even that is not sufficient. The Social Security Trustees estimate that maintaining scheduled benefits would require Social Security’s combined (old age and disability insurance) tax rate to rise immediately from 12.4 percent to 15.8 percent. This would equal an extra $2,600 in Social Security taxes taken from a median household that has about $74,600 in annual income. CBO estimates that significantly larger tax increases are necessary to maintain scheduled benefits. CBO’s estimate of a 17.5 percent Social Security tax rate would equal an extra $3,800 in annual social security taxes for the median household.

  4. Social Security’s shortfalls and the costs of reform are rising rapidly. Social Security’s unfunded obligations equal the amount by which Social Security’s scheduled benefits exceed its scheduled tax revenues. In other words, it is a metric of the program’s long-run shortfalls, and thus the “cost” of making the program solvent. Social Security’s current unfunded obligations of $22.4 trillion equal about $172,000 for every household in the United States. Social Security’s shortfalls increased by $2.0 trillion or $15,000 per household over the past year alone. And over the past decade, Social Security’s shortfalls more than doubled, from $9.6 trillion in 2012 to $22.4 trillion in 2022. The longer Congress waits to reform Social Security, the higher the costs will be for current and future Americans.

  5. Social Security is an increasingly bad deal for current and future generations. Social Security is an incredibly popular federal program. In part, that’s because it provided early generations of Americans with far more in benefits than they contributed to it in taxes. But it’s also popular because Americans don’t know what they would have had absent Social Security’s taxes and benefits.

    Without Social Security, workers would have had larger paychecks and higher personal savings. Since Social Security taxes are immediately spent to pay for current benefits, what could have been workers’ savings is instead immediately spent and never has a chance to earn a positive rate of return. What workers get from Social Security is not a function of how much they saved and how much their savings grow over time; instead, it is entirely dependent on Social Security’s benefit formulas and on future politicians’ willingness to redistribute money from active workers to retirees.

    An analysis I worked on at the Heritage Foundation showed that the average younger worker today would receive nearly three times as much from their own savings as Social Security can provide. Even low-wage workers making about $20,000 a year could have 40 percent larger incomes in retirement as a result of saving on their own.

Unfortunately, all of this means Social Security is a popular but broken program.

Preserving Social Security will require lawmakers to make difficult decisions, but it is possible to maintain Social Security’s original purpose through reforms that make most people – and the entire economy – better off.

The sooner policymakers act, the less harmful the consequences will be for current and future generations.  

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