The Social Security Act was passed in 1935 to reduce poverty levels among older Americans. At the time, the U.S. economy had crumbled under the weight of the Great Depression, and more than half of seniors lacked the means to support themselves financially. The Social Security program replaced many ineffective state-run pension plans, providing retired workers aged 65 and older with a reliable source of income.
Social Security has since expanded to cover other types of beneficiaries -- the spouses of retired workers, survivors, and disabled workers -- and the program has been relatively successful. Social Security benefits kept nearly 22.5 million individuals out of poverty in 2020, according to the Center on Budget Policy and Priorities.
That said, the Social Security program is facing some big problems, and one of the most concerning issues is the potential depletion of the trust fund that pays benefits. In fact, 70% of Americans age 26 and older worry the Social Security program will run out of funding in their lifetimes, and 33% of those individuals believe they will never receive a dime in Social Security benefits, according to the Nationwide Retirement Institute.
Are they right to worry?
The Social Security trust fund faces depletion in 2035
Social Security comprises two trust funds. The Old-Age and Survivors Insurance (OASI) Trust Fund is the source of retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund is the source of disability benefits. Both are funded by payroll taxes and interest earned on invested assets.
Unfortunately, Social Security operated at a $56 billion loss last year as income failed to cover costs. Worse yet, the Board of Trustees expects that trend to continue indefinitely, resulting in the depletion of the combined OASI and DI Trust Funds in 2035. At that point, income from payroll taxes will cover just 80% of scheduled benefits, declining to 74% of scheduled benefits by 2096.
That problem can be traced back to one issue: the aging population. The number of Social Security beneficiaries is rising more quickly than the number of tax-paying workers. Birth rates have fallen significantly since the baby boom ended, causing the worker-to-beneficiary ratio to drop from 16.5 in 1950 to 2.8 in 2021, and that figure is expected to hit 2.3 by 2035.
Put simply, the Social Security program is battling an unsustainable trend: Costs are rising more rapidly than income.
Will the Social Security program run out of money?
The answer is no. As mentioned above, Social Security beneficiaries will still receive 80% of scheduled benefits in 2035, even if the OASI and DI Trust Funds are depleted by that time, and they will still receive 74% of scheduled benefits by 2096. As long as there are tax-paying workers, the Social Security program will continue to generate some income each year, meaning there is virtually no risk that benefits will disappear completely.
That said, a reduction in benefits is not an ideal outcome. Officials in Washington are well aware of that fact, and politicians from both sides of the political spectrum have proposed changes to Social Security that could keep the OASI and DI Trust Funds solvent or at least delay their depletion.
One of the more popular proposals is applying Social Security payroll tax to more income. Currently, the maximum taxable earnings limit is $147,000, meaning any earnings that exceed that amount are not subject to Social Security payroll tax. But President Joe Biden has endorsed the idea of adding a second tier so that any earnings above $400,000 are also taxed. Other government officials have proposed more drastic changes, such as applying Social Security payroll tax to earnings above $250,000.
It's also worth noting that the OASI and DI Trust Funds may not run dry in 2035. The Board of Trustees made a great many assumptions to arrive at that conclusion, including estimates regarding future birth rates, life expectancy, wages, unemployment, inflation, and interest rates. Given the potential for error, the Board of Trustees modeled three different scenarios: One assumes lower costs, one assumes higher costs, and one splits the difference. Based on those three scenarios, the OASI and DI Trust Funds could be depleted anytime between 2031 and 2069. But that doesn't change the fact that the Social Security program will never go completely broke as long as people continue to pay taxes.