Needless to say, Social Security has become a controversial topic among the general public, policymakers, and lawmakers in Washington, D.C.
There's no ignoring the fact that the program has serious funding issues because scheduled annual benefits currently surpass the funds the program brings in each year via payroll taxes. But a lot of people have leaned into rumors that suggest the program won't be around in the future or will soon go bankrupt. Here's the surprising truth about the future of Social Security.
No, it's not going bankrupt
Again, I don't want to brush over the program's financial issues because there is plenty there, but it is not actually true when people say the program is going bankrupt.
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The problem with Social Security is that the total amount of scheduled benefits that the program has to pay out to retirees every year now exceeds the funding the program brings in annually. Social Security is largely funded through a payroll tax: 6.2% for employees and employers and 12.4% for self-employed individuals. And, it is important to note, this tax is only assessed on the first $160,200 of a person's annual income -- a number known as the benefit base.
But because incoming payroll taxes each year no longer cover all the benefits being paid out, the Social Security Administration (SSA) has had to dip into the program's reserve funds to cover the shortage.
The two Social Security trust funds are the Old-Age and Survivors Insurance (OASI) Fund, which pays out most normal retirement benefits, and the much smaller Disability Insurance (DI) Fund, which pays out disability benefits. In 2021, the program had to start dipping into the OASI fund to cover the shortfall.
According to the Social Security Board of Trustees annual report, the OASI fund is projected to be depleted by 2033. At this point, income from payroll taxes will be enough to cover 77% of scheduled benefits. However, in this scenario, Congress would likely authorize SSA to dip into the DI Fund to help pay benefits. But even when you combine the assets of both trust funds, they are projected to run out by 2034. Once this happens, there is only expected to be enough funding from annual payroll taxes to pay out 80% of scheduled benefits.
While a 20% cut to benefits is certainly a huge deal and would have a significant impact on the well-being of retirees that claim Social Security, it is not the same thing as the program going belly up.
Why it's unlikely to happen anyway
The concerns about Social Security and its financial situation are very real. But I think most suspect that lawmakers will take action before having to significantly cut benefits because that could lead to significant housing and healthcare issues and a jump in poverty in the country.
While Democrats and Republicans have vastly different ideas on how they want to solve Social Security's funding issues, I ultimately do think they will come up with a solution before 2033, likely through tax hikes or some kind of smaller cut to benefits. The retirees who claim Social Security also vote at high rates, so harming the program could isolate a big part of the electorate from either party.
That's why the surprising truth about Social Security is that we still have a ways to go before the program goes bankrupt and we are not likely to get to that point, given the ramifications.
