Most of us have heard the news about the challenges facing Social Security. Since 2010, tax and other noninterest income have not fully covered program costs, and since 2021 benefits paid have exceeded income from all sources. Without Congressional action, it is projected that by 2034 the Social Security Trust Fund’s $2.7 trillion in reserves will be exhausted and benefits will have to be slashed by over 20%. You may wonder who is to blame for this mess. Rumors abound accusing past administrations of “raiding” the Social Security Trust Fund to bankroll other projects. It is a great story, but like many great stories it’s not entirely true. So, what is the truth?
As has always been the case, the law allows the trust fund to be used only to pay for Social Security benefits and the expenses of administering the program. So, no prior administration has “raided” the trust fund, but such rumors may stem from the nature of assets held in the trust fund. In an earlier article I explained that the trust fund is not just a pile of cash but is comprised of interest paying government bonds. Each year that income exceeds payouts, the excess is required to be used to purchase these U.S. bonds. The government is then free to use the cash for other purposes. But this is merely a loan – the bonds (and interest due) must be paid back to the trust fund as needed to pay benefits.
Much of the dilemma Social Security faces is the result of changing demographics.
- Our population is living longer. In 1955 only 8.5% of the U.S. Population was over age 65. As of 2022, that number had risen to 17.3% of the population being over age 65.
- Low birth rates have decreased the number of workers paying into the system. In 1955 there were nearly 9 workers paying into Social Security for every person receiving benefits. That ratio is now 2.7 workers for each person receiving benefits, and it is projected to drop further in coming years.
Despite the increase in average lifespans, the full retirement age for Social Security has not been changed since 1983.
Social Security’s problem is an essence a math problem, and there are two ways to fix the shortfall – increase taxes and/or reduce benefits. Any politician supporting legislation to do either would face a firestorm of criticism and have slim chances of reelection, which is why the legislature has been hesitant to address the problem. It is likely that some corrective action is forthcoming prior to the projected shortfall in 2034, but what that may look like is anybody’s guess.
