There are common misconceptions when it comes to the current state of Social Security, especially among the younger generations. You may have heard that Social Security is completely broke, or that it is using general tax revenue to pay benefits. Or some people may tell you that Congress "stole Social Security's money," and the program has nothing but a bunch of IOUs.
With that in mind, let's go over some of the most important facts younger Americans should know about Social Security.
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1. Social Security is not bankrupt
While it's true that Social Security's reserves aren't a massive pile of cash in a vault, Social Security is far from broke.
At the end of 2022, Social Security had $2.83 trillion in its trust funds. And like any responsible financial planner would do, this money is invested to generate returns. Social Security's trust funds are invested in Treasury securities and generated $66 billion in interest income for the program in 2022 alone.
2. It could run out of money in about a decade
Social Security has lots of money now, but the bad news is that it isn't going to forever. The program operated at a relatively modest $22 billion deficit in 2022, but as the massive baby boomer generation ages and starts collecting benefits, the deficit is expected to rise rapidly. Based on the latest projections, Social Security's reserves are expected to be completely depleted in 2034.
3. What happens if Social Security runs out of money?
If Social Security ends up broke in 2034, what happens then? The good news is that checks won't simply stop. Social Security will still bring in payroll tax revenue, and some high-income retirees pay tax on the Social Security benefits they receive. In 2022, these two revenue sources generated about $1.16 trillion for Social Security.
So, if Social Security's reserves are depleted, it would result in a benefit reduction, not a benefit elimination. It is estimated that even without reserves, Social Security will be able to pay out 80% of scheduled benefits.
4. This isn't the first time
In 1983, Social Security was in bad shape. I mentioned in the last section that we're 11 years away from the Social Security trust funds running out of money. But in 1983, the program was just three months away from insolvency.
In response, Congress passed the bipartisan Social Security Amendments of 1983. Among other things, they gradually increased the Social Security tax rate on employers and employees from 7% to 7.65%, established the taxation of some Social Security benefits for higher earning retirees, and were the legislation that increased the full retirement age from 65 to 67, which is still being phased in today.
5. There is still time to fix the problem
The good news is that there is still time to fix the problem, and the sooner something is done, the less painful it will be. And there are a number of potential changes that could increase Social Security's financial health, such as:
- Increasing the payroll tax rate.
- Increasing or eliminating the maximum taxable wages for Social Security.
- Imposing an additional Social Security tax on high earners.
- Lowering benefits for higher earners.
- Gradually increasing the full retirement age for Social Security.
An eventual solution could be in the form of any combination of these or other fixes. But there's still time to fix the problem, and history tells us that's what is likely to happen.
