Why Is Social Security Running Out of Money?

Demographic changes mean more retirees and fewer workers paying payroll taxes

Social Security was created as a contributory old-age insurance plan with limited and phased-in benefits for retirees in 1935. The program extended benefits to survivors of beneficiaries by 1939, to farm and domestic workers and the self-employed in 1950, and to disabled workers in 1957. Congress postponed planned payroll tax increases during the program's early years.

The pattern of favoring political expediency over the system's long-term solvency persists. With payroll taxes no longer fully covering the benefits paid out, Social Security's cash reserves are projected to run out by 2033. Benefits will have to be reduced by more than 20% at that point unless Congress enacts a legislative fix.

Key Takeaways

  • Social Security benefits are funded by a dedicated payroll tax paid by employees, employers, and the self-employed.
  • Current taxes and any accumulated surplus fund everyone's benefits. Payroll tax contributions are not reserved for future payouts to the particular taxpayer.
  • Fewer workers are left to contribute toward the benefits of each retiree as Baby Boomers retire and the U.S. population ages.
  • Social Security's retirement benefits trust fund is projected to deplete reserves in 2033, leaving it reliant on tax receipts covering 77% of scheduled benefits.
  • Members of Congress continue to put forth proposals to address the shortfall in the Social Security program.

Understanding Social Security

The Social Security program is funded through the Federal Insurance Contributions Act (FICA) tax, a dedicated payroll tax. Social Security taxes amount to 12.4% of wages up to a cap on taxable annual income set at $147,000 for 2022 and at $160,200 for 2023. Employees and employers split the tax contributions 50/50, with employees paying 6.2% of their wages and employers paying the other 6.2%.

The Social Security Act became law with U.S. President Franklin D. Roosevelt's signature on Aug. 14, 1935. But it would take more time for the Social Security program to turn into the mainstay of the U.S. social safety net.

You pay the entire 12.4% if you're self-employed, but you can deduct half of that from your taxable income as an above-the-line adjustment to income. Receipts go into the Social Security trust funds, which use them to pay benefits. The funds invest any surplus in U.S. government debt.

The payroll taxes you contribute to the Social Security system aren't set aside to pay your benefits when you become eligible. They fund payouts for current beneficiaries or are saved as part of the system's surplus. This means that everyone's future benefits depend on the solvency of the entire Social Security system rather than on their own contributions.


The year the Old-Age and Survivors Insurance (OASI) Trust Fund used to pay Social Security retirement benefits will be depleted, according to 2023 projections by Social Security trustees. Ongoing payroll receipts will cover 77% of scheduled benefits at this point.

The Problem With Social Security

Americans have fewer children and live longer, and these trends contribute to an aging population. The outsized generation of Baby Boomers (those born between 1946 and 1964) is retiring at a record pace, further lowering the proportion of the population in the workforce.

Based on U.S. Census projections, 17% of the population was age 65 and over in 2020. That share is expected to increase to 24% by 2060. Meanwhile, the proportion of the working-age population is due to shrink from about 62% in 2020 to 57% in 2060.

There will be fewer workers to support each retiree in the future as a result. The ratio of workers paying Social Security taxes per beneficiary is projected to decline from 2.8 in 2021 to 2.3 by 2035. The 2023 report from the Social Security and Medicare Boards of Trustees predicted that Social Security's trust fund for retirement benefits will deplete its reserves in 2033, one year earlier than was projected in 2022. Tax receipts are expected to cover 77% of the scheduled benefits at that point.

The Old Age and Survivors Insurance Trust Fund, which pays retirement and survivor's benefits, isn't the only Social Security fund projected to deplete its reserves. The trustees' 2023 report also predicted that the Hospital Insurance (HI) Trust Fund, which finances Medicare Part A, will be depleted in 2031, three years later than projected in 2022. Payroll taxes will cover 89% of scheduled benefits after that point.

Possible Solutions

Fortunately, a large, across-the-board benefits cut is only the worst case scenario. Congress has more than a decade to act to shore up Social Security's finances, and lawmakers continue to generate proposals for doing so. The Social Security Administration routinely publishes estimates of such plans' projected effects on the Social Security trust funds.

Congress has options for how to fill the gap in Social Security funding. These include:

  1. Raising payroll taxes
  2. Lowering benefits
  3. Setting a higher retirement age
  4. A combination of all these options

The growing population of retirees is likely to become an even more politically powerful constituency, one with a direct financial incentive to defend Social Security benefits and assure the system's future. Despite its reluctance to increase Social Security payroll taxes in the program's early years, Congress has subsequently approved numerous such hikes to preserve the program. Proposals to means-test benefits and to eliminate the annual cap on income subject to Social Security taxes have fewer historical precedents, but they may enjoy more popular support.

Social Security's projected long-term funding shortfall of 3% of the gross domestic product (GDP) is manageable, but the program's trustees note in their report that Congress must act quickly to create a workable plan and reassure taxpayers. The longer the fix takes, the more painful the solution is likely to prove for everyone who depends on it.

What Are Social Security Benefits?

Social Security benefits are monthly payments made to qualified retirees and disabled workers. These benefits can also be paid to spouses, ex-spouses, children, and survivors. Benefits are paid out of the Social Security trust funds, which are funded by payroll taxes from current workers. The value of benefits depends on factors such as your income and how old you are when you start taking Social Security.

What Is Full Retirement Age?

Full retirement age (FRA) is the age at which you're eligible for full retirement benefits from Social Security. FRAs vary depending on when you were born. It's 66 years and two months for those born in 1955 and it gradually increases to 67 for those born in 1960 and after. Your monthly benefit will be lower if you start taking Social Security benefits before you reach full retirement age.

Will Social Security Disappear When It Runs Out of Money?

The prediction that Social Security will be depleted doesn't mean that Social Security will disappear in 2033. It means the trust fund that helps pay retirement benefits will run out of money. Social Security will continue to be funded from the FICA taxes that are paid annually by workers and employers, but these payroll taxes will only be able to cover 77% of retirement benefits without contributions from the trust fund unless Congress acts to fix the program.

The Bottom Line

Retirement benefits from Social Security are funded by a payroll tax that's paid by employees and employers. The money you pay into Social Security isn't set aside for you personally. These current taxes plus the money in the Social Security trust fund pay for everyone's benefits.

There are fewer workers left to contribute to retirement benefits as the U.S. population ages and more Baby Boomers retire. The Social Security retirement trust fund is projected to be depleted by 2033 as a result. Current payroll taxes will be enough to cover 77% of scheduled retirement benefits at that point unless Congress passes legislation to fix the program.

Article Sources
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