Social Security provides Americans with the retirement and disability benefits they need in order to make ends meet. Yet the program is going through a financial crisis, with many pointing to potential disaster within the next 16 years if lawmakers can't make needed reforms to the program.
Social Security gets most of its funding from the payroll taxes that workers have withheld from their paychecks. In 2017, those taxes made up $874 billion out of the nearly $1 trillion in revenue that went toward paying benefits. Yet interest on the money that Social Security has saved in its trust funds has provided a vital supplement to payroll tax revenue. Without that interest, the demographic pressures from a flood of baby boomers retiring would have already sent trust fund balances falling in recent years.
One key problem for Social Security is that the interest that the trust funds have generated has already been on the decline for quite a while:
Data source: Social Security Administration. Chart by author.
Having climbed through the 1990s and 2000s, interest hit a peak of $118.35 billion in 2009. Since then, the number has fallen off dramatically, amounting to $85.12 billion in 2017.
Two factors have put Social Security on course to see ever-shrinking interest income. Even as trust fund balances continued to rise in the early 2010s, lower interest rates put pressure on the special investments that Social Security's trust funds hold to generate income. Now, rates are starting to rise, but a larger number of retirees will force the trust funds to spend down principal beginning this year in order to pay benefits. As the total trust fund balance falls, there'll be less money to generate interest income.
Policymakers have known for some time that this downward spiral was coming. Now that it's here, it's more important than ever for lawmakers to take action if they want to preserve Social Security for future generations.
