Even if you don't follow Social Security too closely, you've still likely heard people talk about how the program is running out of money. You may have even heard the claim that Social Security won't be available by the time you are eligible to claim benefits.
There's certainly no sugarcoating it: Social Security is dealing with a significant shortfall and significant financial issues in the near future, especially if lawmakers do not act.
But the claims that the program is going bankrupt or that there won't be benefits for future Americans and those who currently claim benefits have been greatly exaggerated. Here's what everyone gets wrong about the future of Social Security.
So what's the problem?
The Social Security program is largely funded by a payroll tax. Individuals and employers each pay 6.2% in annual Social Security taxes on an individual's wages, while self-employed individuals are on the hook for a 12.4% annual tax. However, due to population trends, including a surging elderly population, the program has been paying out more in benefits than it has been collecting in payroll taxes.
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As a result, the Social Security Administration (SSA) has had to dip into its reserve funds. There are two main reserve funds. The Old-Age and Survivors Insurance (OASI) Trust Fund pays out benefits to retirees, their spouses, and certain eligible children. Then there's the Disability Insurance (DI) Trust Fund, which pays out benefits to disabled workers and their families.
According to this year's Social Security Board of Trustees annual report, the OASI Fund is projected to be depleted by 2033, one year earlier than expected, due to lower expected gross domestic product and labor productivity in the years ahead. The DI Trust Fund is in better shape, but once the much larger OASI Fund is depleted, lawmakers would likely reach into the DI fund to continue to pay out benefits. When you pool the assets of the OASI and DI funds, they are projected to be depleted by 2034.
But what happens next is what everyone seems to get wrong about Social Security. When the trust funds run out, Social Security is not kaput. Remember, workers are still paying the payroll tax every year. As I established earlier, the payroll tax is not enough to cover all benefits. When the OASI Fund is depleted, the SSA would be able to pay out 77% of scheduled benefits in 2033. Once both the OASI and DI funds are depleted in 2034, the SSA would be able to pay out 80% of scheduled benefits.
I certainly do not want to downplay the significance of a 20% cut to benefits, which by some accounts have already lost a considerable amount of purchasing power in the 21st century. But to say the program is going bankrupt or won't be around in 2034 and beyond is simply not true.
Keep in mind
The other big thing to keep in mind is that despite the extremely partisan nature of politics these days, I think it is very unlikely that lawmakers won't act in some capacity to shore up the Social Security program.
If there is a 20% or 23% cut to benefits, that would very likely result in significant political, social, and economic problems for retirees that could snowball into broader issues for the entire country.
I expect negotiations between Republicans and Democrats to be tense because the solution may require some kind of tax hike or cut to benefits, both of which are hot-button issues for the two parties. But another thing to remember is that the program caters to 66 million Americans, most of whom are elderly and tend to vote at high rates, so a big cut to benefits is not likely to be too popular among voters in either party.
Social Security benefits could face a significant cut by 2033, but that does not mean the program is finished and won't continue to pay out benefits. Furthermore, I think even this cut is very unlikely. I fully expect lawmakers to pass legislation to shore up the program -- because the U.S. will face very severe problems if they don't.
