Social Security Can’t Go Bankrupt - The Motley Fool
Social Security is a pay-as-you-go system, with current workers paying for current recipients. As long as people continue to work and pay into Social Security, it can’t go broke.
As a matter of law, all revenues flowing into Social Security are received by the U.S. Treasury and immediately converted into special interest bonds. These bonds are then held by Social Security in the program’s trust funds (the Old Age and Survivors Insurance and Disability Insurance trust funds) and redeemed as necessary to pay benefits. Excess revenues over disbursements increase the trust fund reserve balance, while excess distributions reduce the trust fund balance.
In 2011, the income from payroll taxes alone became insufficient to meet payable benefits, causing the program to draw on interest in addition to income tax revenue to make up the difference. As of 2021, the combined revenue from all sources became insufficient to cover benefits paid, causing the program to resort to liquidating reserves to meet promised benefits. This liquidation of reserves, if not corrected, will lead to the eventual full depletion of the trust funds’ balances.
When the trust fund reserves are fully depleted, Social Security benefits will be forced to move to a cash basis, where benefits paid must equal revenues received. The reality of this situation sets program beneficiaries up for severe consequences in less than a decade. This shift to cash-in/cash-out is projected to result in a substantial, across-the-board reduction in benefits — a reduction that will grow as more retirees enter the program.
The Social Security Trustees’ most recent report projects the Old Age and Survivors Insurance (OASI) trust fund will be depleted in 2033. If OASI were to be combined with the Disability Insurance trust fund, complete depletion is projected for 2034. If this were to happen, the result would be that 81% of benefits would be payable. The reduction would affect all current and future retirees, and taking your benefits early will not prevent them from being reduced. You shouldn’t let this affect your decision on when to claim your benefits, especially if you will be heavily dependent on your Social Security benefits. To read the latest Social Security Trust Fund report, click here ….
Based on past history, it is reasonable to assume that Congress will intervene to address the long-term funding problem before the point of complete trust fund depletion is reached. Of course, the closer we get to the point of full depletion, the more severe the corrective measures will need to be.
For additional thoughts on Social Security’s financial future, check out this post by The Motley Fool’s Maurie Backman.
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