Social Security Solvency: Is Social Security Going Bankrupt? - AMAC Foundation
Mention Social Security, and you’re likely to encounter the rumor that the program is headed for bankruptcy. Here’s the real story.
The AMAC Foundation’s Social Security Advisory Service fields thousands of questions yearly from the public, and many of these deal with basic misunderstandings about Social Security and how it works. The rumor of Social Security’s impending demise is one of the more frequent misunderstandings, often expressed by workers early in their careers who believe that the payroll tax they pay will not yield any return for them when they reach retirement. It’s also a disquieting thought among the soon-to-be retired and among many already in retirement.
Put simply, the answer to the question is a solid “no.” By design, Social Security cannot run completely out of money if there is a workforce paying that ubiquitous payroll tax. But let’s quickly acknowledge that there are indeed long-term funding problems with the program. As of 2021, the program is operating in deficit, using reserves held in its trust fund to make promised benefit payments. These reserves, a resource that reached nearly $3 trillion just a few years ago, will enable Social Security to pay promised benefits for about 6 more years, according to the most recent projections from experts.
Why does the funding shortfall exist?
The root causes of Social Security’s deficit are complex but fall into a few basic categories. First, as a society, we are living longer and thereby drawing on Social Security for many more months than originally projected. Back when the program was designed, life expectancies in the 60-year range were about average compared to today’s 80s.
Compounding the effect of increased years of benefits is the growing imbalance between workers paying into the system and retirees drawing benefits. In the 1940s, there were more than 40 workers supporting each beneficiary. Today, that ratio is less than 3-to-1, and this imbalance is likely to worsen in the future because of declining birth rates. Further exacerbating the problem is the massive shift of “baby boomers” from the workforce to retirement, with many opting to draw benefits at the earliest possible age and thus for a longer period.
A third significant contributor to the insolvency problem is a phenomenon the actuaries call “income dispersion.” This is an issue that’s been cited by Social Security’s actuaries as a leading cause of insolvency arriving about 25 years earlier than expected. Following major changes to address a similar Social Security financing problem in the early 1980s, it was projected that the program would remain fully funded until the late 2050s. This was based on an assumption that 90% of the U.S. workforce payroll—about $15 trillion today—would be subject to the payroll tax (the 6.2% that workers and their employers pay). By the 1990s, though, this had dropped to about 82.5%, because earnings for those who exceed the annual maximum ($184,500 this year) greatly exceeded projections, and the amounts exceeding the cap—where FICA taxes stop—escaped the tax. So, about 7.5% of the projected Social Security payroll tax revenue stream was lost. The 82.5% remains level from the late 1990s and into the 21st Century.
As a result of these and other demographic factors, Social Security has begun to draw down its cash reserves to continue paying promised benefits, something the program has done reliably for over eight decades.
What happens when Social Security reserves are gone?
According to Social Security’s Board of Trustees, depletion of the program’s trust fund reserves would necessitate a more than 20% reduction in monthly benefit payments. This reduction would be across-the-board, impacting the entire beneficiary population — a demographic cohort expected to exceed 80 million people at that point.
But what’s the likelihood of that happening? Despite many years of congressional inattention to the problem, many who have studied the situation appear optimistic that corrective action will be developed in time to avoid the dire consequences of a full trust fund depletion. It’s not the first time Social Security has faced insolvency; many remember the 1980s and President Reagan’s Executive Order creating the National Commission on Social Security Reform, appointed to address a remarkably similar situation. That Commission’s recommendations led to resolution of the financial crisis emerging in the late 1970s and set the stage for Social Security law changes ensuring solvency for the next several decades.
Legislative proposals to address the current funding shortfall have been introduced in Congress repeatedly over the past few years, but so far, no agreeable pathway to a solution has been reached. Unfortunately, the clock is ticking loudly, and the longer it takes to carve out a solution, the more severe the corrective measures are likely to be. Fortunately, while the clock ticks, many organizations are developing recommendations for congressional consideration.
AMAC’s Position on Saving Social Security
Here at AMAC, we’ve been focused on this problem for many years and have developed a 15-point plan to address insolvency and preserve Social Security for generations to come. Our plan, the AMAC Social Security Guarantee, is a thoroughly researched and well-balanced proposal that examines the entire Social Security structure and recommends a series of adjustments and formula changes to realign Social Security with the 21st-century economy.
The AMAC plan, through relatively slight program modifications, would achieve solvency without payroll tax increases and would include changes to the age at which benefits are maximized, redistribution of cost-of-living adjustments, and modifications to the formulas for calculating payments to higher-income beneficiaries. We also recommend an increase in the thresholds where benefits are subject to income tax and indexing of these thresholds annually to account for inflation, along with improved survivor benefits, eliminating the reduction in benefits for those choosing to work before full retirement age, and improved savings tools for future retirees, including a savings option that builds estate value.
Further, the AMAC plan would guarantee solvency and pave the way for Social Security to honor the obligations to those who have earned their benefits through a lifetime of participation in the American workforce.