We hear from some folks that Social Security is going bankrupt. Is there any truth to that? First, we'll review the basics of the Social Security program, and then we take a look at the latest numbers provided in the 2019 Annual Report from the trustees that oversee the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds. Finally, we’ll look at possible fixes that have been proposed to keep Social Security solvent and able to pay benefits for the next 75 years.
- The 2019 Social Security Trustees Report shows that retirement/survivor and disability funds will run out in 2035, one year later than last year’s estimate.
- A key reason: The Disability Insurance trust fund is now estimated to last 20 years longer than previously thought—until 2052.
- Demographics means fixes are still needed to keep both of these funds solvent.
- Repair options include raising the payroll tax, eliminating the ceiling over which no SS taxes are paid, changing how COLA is calculated, raising the retirement age, and investing SS funds in the stock market.
Notice that insurance is part of the names of both Social Security trust funds. That’s because Social Security was designed during the Great Depression as a safety net to be sure that we never again find seniors living under bridges, as was common during the Depression. It was designed as insurance, and Social Security payments are called “benefits.”
But first, some terminology. The whole program managed by the Social Security Administration (SSA) is known as Old-Age, Survivors, and Disability Insurance (OASDI). Note that, as the annual report's name makes clear, there are two funds: one for retirees (the OASI Trust Fund) and one for the disabled (the DI Trust Fund). The financial status of each is in a very different position, with different possible solutions to fix the financial problems.
How Does Social Security Pay the Benefits?
Social Security benefits are based on a “pay-as-you-go” system. That means current workers pay Social Security taxes, while current retirees get benefits based on that tax revenue and earned income from the trust fund bonds.
The concern related to that “pay-as-you-go” structure is that the huge Baby Boomer generation (people born between 1946 and 1964) will create a crisis because so many will begin collecting Social Security. By the year 2031, when the youngest Boomers reach age 67, there will be 75 million people over the age of 65, nearly double the 39 million who were that age in 2008. This will change the ratio of retirees collecting benefits to workers paying into the system. The beneficiary-to-worker ratio is expected to rise from 35 per 100 in 2014 and reach 45 per 100 in 2030, putting a strain on that “pay-as-you-go” system.
The year that the Old-Age, Survivors, and Disability Insurance (OASDI) trust fund will run out of money.
This Baby Boomer wave was not unexpected; in fact, it was planned for in 1983 when Alan Greenspan headed the National Commission on Social Security Reform, also known as the Greenspan Commission. At that time, the trust funds almost did run out of money. The commission did an excellent job of finding fixes to deal with the Boomer wave. One of the biggest changes was accelerating scheduled increases in Social Security tax rates, in order to build up the trust funds. In 1983, the tax rate was 5.4% for employees and another 5.4% for employers. The commission proposed hiking it to 5.7% beginning in 1984, then to 6.06% in 1988 and 6.2% in 1990.
The year that the Disability Insurance (DI) trust fund will run out of funds.
Today’s Social Security Finances
The Greenspan Commission’s fix worked just as intended, and the nation has billions in the Social Security trust funds. The 2019 annual report on the trust funds showed these basic facts:
- The OASDI trust funds held $2.895 trillion dollars at the end of 2018, or 273% of the estimated cost for 2019.
- Total expenditures for 2018 were $1 trillion, and total income was $1.003 trillion.
- Collectively, OASDI trust fund reserves will be depleted in 2035. Last year, the depletion date was estimated at 2034.
- Depletion dates are different for the two funds: OASI trust funds are estimated to run out in 2034, and DI reserves in 2052. Last year, DI reserves were projected to run out in 2032. The reason for the difference, according to the report: "DI applications and benefit awards, both of which fell well below levels projected in last year’s report for 2018."
- When OASI trust funds are depleted in 2035, only 77% of Social Security benefits will be able to be paid based on the “pay-as-you-go” income to the OASI trust fund.
- When DI funds are depleted, if there is no fix in time, 91% of disability benefits will be able to be paid based on the “pay-as-you-go” income to the DI trust fund.
- For the 75-year projection period, the actuarial deficit is 2.78% of taxable payroll (a decrease from 2.84% last year). In other words, Social Security taxes would need to increase by 2.78% to fix the problem permanently.
Note that the numbers are slightly better than last year's report, but far from a sign that the problems are over. Demographics—the huge baby boom generation and the much smaller Gen X one—show that they won't just melt away no matter how good the economy is.
Yes, a fix is needed to avoid a reduction in benefits when the trust funds run out of money. Many different fixes have been suggested to restore Social Security’s financial health for the next 75 years. A tax increase is not the only way. It is most likely that some combination of the fixes will be used to minimize the impact on everyone. The sooner Congress acts to fix the system; the less painful the fix will be.
Fix 1: Raise the payroll tax rate.
To remain fully solvent over the next 75 years, payroll taxes would have to rise by 2.7 percentage points to 15.1%. At the moment, the rate is 12.4%, with 6.2% coming each from the worker and their employer.
Fix 2: Raise the ceiling on which Social Security taxes must be paid.
The ceiling was $132,900 for 2019, but the cap is adjusted for inflation each year and rose to $137,700 in 2020. Eliminating the payroll cap, while leaving in place current rules for capping benefit calculations, would eliminate 84% of the projected 75-year shortfall.
Fix 3: Change the way the annual cost-of-living adjustments are calculated.
The COLA for 2019 was 2.8%, the largest in seven years. A 1.6% hike followed for 2020. In some years, though—2016, for example—there is no COLA. This means changes may not be an effective long-term fix.
Fix 4: Raise the full retirement age.
Right now, the full retirement age for Baby Boomers is 66, and for those who were born in 1960 or after it is 67. Some people are suggesting that the full retirement age be increased to 69 or 70.
Fix 5: Invest Social Security trust funds in the stock market.
Some people want the Social Security Administration to invest some of the trust fund money in the stock market to get a better return.
The Bottom Line
Social Security is nowhere near bankruptcy. As Alicia H. Munnell, director of the Center for Retirement Research at Boston College, put it in her analysis of the Trustees 2017 report: "Social Security faces a manageable financing shortfall over the next 75 years, which should be addressed soon to share the burden more equitably across cohorts, restore confidence in the nation's major retirement program, and give people time to adjust to needed changes."
Even if there is no fix in the next 20 years, reduced benefits could be paid with “pay-as-you-go” tax revenue. The sooner Congress passes a fix, the better it will be for all of us.