Social Security is not in danger of running out of money under its current funding system. However, President Trump has proposed eliminating payroll taxes, which are currently its primary source of funding.

If this occurs and the lost revenue is not replaced with a transfer of funds from the general fund, the consequences would be dire. In fact, the Social Security Office of the Chief Actuary indicated it would be just a few years before there was no money available to pay any benefits at all. 

Broken white piggy bank with coins spilling out.

Image source: Getty Images.

Benefits could end for retirees by 2023

In response to a request from several Democratic Senators who wished to explore the consequences of payroll tax elimination, the Office of the Chief Actuary determined what would happen if payroll taxes stopped being collected on Jan. 1, 2021 and collection did not resume. 

If payroll tax money stops coming in and is not replaced by another source of funding, Social Security would still have some income. This would include taxes on benefits paid by high earners and interest income from the program's trust funds.

However, these sources of income are expected to account for less than 10% of the billions of dollars the Social Security Administration currently receives. Social Security would be forced to pay benefits out of the trust fund with very limited revenue coming in, which would quickly deplete it so it would earn even less interest income. 

As a result, the trust fund reserves for disability benefits would be permanently depleted by the middle of the calendar year in 2021, and the trust fund reserves for retirement benefits would be permanently depleted in the middle of 2023. 

Unfortunately, the Chief Actuary explains that while Social Security is required to pay retirement and disability benefits, it can only do so from money in the program's trust funds. Social Security cannot just borrow to pay benefit it has promised. So when the trust fund would be left permanently depleted in 2023, the program would have "no ability" to pay retirement benefits thereafter. 

Is this a likely scenario?

To be clear, this is the consequence if payroll tax collection stops permanently and no other changes to the law occur to provide an alternative funding source.

In the past, when payroll taxes have been reduced, money has been diverted from the general fund to make up for the losses. President Trump has suggested he would follow this blueprint and simply pay for Social Security benefits out of the government's regular budget if he gets his payroll tax cut.

The President doesn't have the legal authority to end payroll taxes or divert money from the general fund to Social Security. An Act of Congress would be required. 

It's possible, although not very likely, that the President could push through a payroll tax cut, as he's made this a key campaign promise. A lot depends on whether he's reelected, if there is a Republican majority in the House and Senate, and how large that majority is. But any law reducing or eliminating payroll taxes would almost assuredly include provisions for an alternate source of revenue.  

While this would make Social Security more vulnerable because it would no longer have its own dedicated funding stream, it's inconceivable to imagine a change to the law where the program is stripped of revenue with no replacement funds. That makes it very unlikely Social Security will end up totally out of money in 2023 and be forced to stop paying benefits.

Still, the Office of the Chief Actuary's warning about how ending payroll taxes could bankrupt Social Security in three years is well worth listening to. It underscores how much of an effect tinkering with these taxes could have. Make sure to think about that when you vote in the November election and let your representatives know your preferences.