For most Americans, Social Security income is, or will eventually become, a necessity.
In April 2023, national pollster Gallup surveyed retirees to gauge their reliance on America's top retirement program. A combined 88% of respondents noted that it represented a "major" (59%) or "minor" (29%) source of income, and is therefore imperative to helping seniors make ends meet. More than two decades of annual surveys revealed similar findings, with anywhere from 80% to 90% of polled seniors leaning on their monthly benefit, in some capacity, to cover their expenses.
Considering how important Social Security is to the financial well-being of our nation's retired workers, workers with disabilities, and survivor beneficiaries, you'd think that ensuring the health of this program would be paramount. Unfortunately, cracks in the foundation are readily apparent. In fact, the worsening financial health of Social Security has some people questioning whether the program will go bankrupt or be there for them when they retire.
Image source: Getty Images.
Social Security is staring into a greater-than $22 trillion abyss
Every year since 1940, which is when retired-worker benefit checks were first mailed, the Social Security Board of Trustees has published an annual report that outlines the health of America's top retirement program. This report also offers short-term (10-year) and long-term (75-year) estimates of what's to come for Social Security.
Beginning in 1985, the Trustees Report began noting a long-term funding obligation shortfall for the program. In other words, the Trustees looked at numerous variables, such as changing fiscal and monetary policy, as well as shifting demographic trends, and offered an educated opinion that long-term revenue collection wouldn't be sufficient to cover all expenses (mostly benefits, but some administrative expenses to operate the Social Security program) in the 75 years following the release of a report.
In the 2023 Trustees Report, it was estimated that Social Security's unfunded obligations through 2097 had ballooned to $22.4 trillion. The program's estimated long-term funding shortfall has grown most years since 1985.
The bulk of the blame for Social Security's worsening financial health primarily lies with ongoing demographics changes. While most people are aware that baby boomers are retiring and weighing on the worker-to-beneficiary ratio, there are a handful of other lesser-known shifts that are adversely impacting the program.
For example, U.S. birth rates are near an all-time low, which will also negatively impact the worker-to-beneficiary ratio over time. Rising income inequality is another problem, with considerably more earned income exempted from the payroll tax than 40 years ago. Even immigration is an issue, with net-legal migration into the U.S. declining for 25 consecutive years.
The OASI's asset reserves may be exhausted by 2033, according to estimates in the 2023 Social Security Board of Trustees Report. US Old-Age and Survivors Insurance Trust Fund Assets at End of Year data by YCharts.
Will Social Security be bankrupt by 2033?
Perhaps most damning of all is the 2023 Trustees Report's projection that the Old-Age and Survivors Insurance Trust Fund (OASI) will exhaust its asset reserves -- i.e., excess cash built up since the program's inception -- by 2033. The OASI is the segment of Social Security responsible for doling out monthly benefits to over 50 million retired workers and roughly 5.8 million survivor beneficiaries.
The all-important question is: If the OASI's asset reserves are completely exhausted in nine years, does it mean Social Security will be bankrupt?
The no-nonsense answer to this question is a resounding no, and I'll explain why.
The Social Security program has three sources of funding:
- The 12.4% payroll tax on earned income (wages and salary, but not investment income) between $0.01 and $168,600, as of 2024.
- The taxation of Social Security benefits.
- Interest income earned on its asset reserves.
Social Security brought in just shy of $1.222 trillion in 2022 from these three funding sources. Approximately $66.4 billion was derived from net interest income. The excess revenue built up since the program's inception is required by law to be invested in special-issue bonds that earn interest. If the OASI's asset reserves were to be depleted, this source of funding would likely disappear.
The reason Social Security is in absolutely no danger of insolvency or bankruptcy is because its other two sources of funding would continue unabated. Select beneficiaries whose provisional income is above preset thresholds would be exposed to the federal taxation of benefits on a portion of their payout.
Meanwhile, the 12.4% payroll tax would continue to apply to the vast majority of working Americans. As long as people continue to work and pay their taxes, Social Security will collect revenue that'll ultimately be disbursed to eligible beneficiaries. Based on how the program is currently funded, it's mathematically impossible for Social Security to go bankrupt or not be there for future generations of retired workers, workers with disabilities, and survivor beneficiaries.
Image source: Getty Images.
Here's what's really at stake for Social Security in nine years
The debate surrounding Social Security's financial health isn't over the program's survivability, but rather the sustainability of its current payout schedule, including annual cost-of-living adjustments (COLAs).
If the OASI's asset reserves were to be exhausted, the Trustees estimate that sweeping benefit cuts of up to 23% may be necessary by 2033 to sustain payouts through 2097, without the need for any further reductions. This is really what's at stake for Social Security and its 67 million beneficiaries. There's no doubt that payouts will continue -- it's simply a matter of whether the existing payout schedule, including COLAs, can be sustained over the long run.
There's also no question that Congress and lawmakers deserve their fair share of the blame for this mess -- albeit not for the reason often ascribed by online message boards. Where lawmakers have failed is in finding a middle-ground solution with so many proposals having been put on the table.
Democrats and Republicans both recognize Social Security's shortcomings. However, America's political parties have approached a "fix" from opposite ends of the spectrum and have, thus far, been unwilling to find common ground with their opposition.
Democrats, including President Joe Biden, have proposed reinstating the payroll tax on high-earning workers and changing the program's flawed measure of inflation to the Consumer Price Index for the Elderly (CPI-E) from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This proposal would seek to raise additional revenue for America's top retirement program while boosting benefits through higher COLAs over time.
Meanwhile, Republicans prefer gradually raising the full retirement age, as well as shifting the measure of inflation from the CPI-W to the Chained Consumer Price Index. The GOP plan aims to reduce program outlays over the long run.
Here's the quirk: The Democrat and Republican plans both work to strengthen Social Security, but they'd work a lot better if bits and pieces were combined into a single plan.
For instance, the Republican proposal does nothing to address Social Security's short-term funding shortfall. Gradually raising the full retirement age would take decades to meaningfully reduce program outlays.
On the other hand, increasing payroll taxation on the rich doesn't, by itself, close Social Security's funding obligation shortfall. It merely kicks the funding issue down the road for a few more years.
Until lawmakers can meet in the middle, the sustainability of the current payout schedule will remain in question.
