Social Security’s Looming Insolvency–Know the Facts - AMAC Foundation
Most folks tuned into current economic affairs are well aware of the projections that Social Security’s trust fund reserves, valued at nearly 3 trillion dollars just a few years ago, will be depleted by 2033 (or 2032, depending on the source). Reaching this point is expected to trigger an across-the-board reduction in monthly benefits of 20 to 30 percent unless corrective action is taken early enough to ward off the catastrophe.
With the growing awareness surrounding Social Security’s plight, many pundits and political figures have entered the discussion, offering viewpoints and suggestions on how to right the course. Of course, all input is important, and the more debate there is, the more everyone has the opportunity to understand the problem and how proposed solutions will affect them.
But first, everyone needs to have a clear and consistent understanding of the problem, including Social Security’s basic financial mechanics. Using information presented in the trustees’ most recent report to Congress, along with other reference sources, our AMAC Foundation staff assembled a brief guidebook for anyone needing to know more about how Social Security works. Here it is:
SOCIAL SECURITY INSOLVENCY – A SUMMARY OF THE ISSUE
Problem Definition
In fiscal year 2033, the Social Security trustees project that the program’s trust fund balances will reach zero. By law, Social Security will then revert to a cash basis, with outlays matching revenue coming into the system. Benefits would then be cut across the board by 20 to 25 percent.
How Social Security Finances Work
- Program revenue is derived from three sources (2022 full-year revenue of $1.222 trillion):
- 91% from payroll taxes on up to $160,200 (2023 limit) of earnings (the 2024 limit is $168,600)
- 5% from interest income
- 4% from income tax assessed on beneficiaries with taxable income above designated thresholds.
- No cash is received directly by the Social Security Administration (SSA); all revenue is received by the U.S. Treasury, converted into special issue treasury bonds, and deposited in Social Security’s trust fund accounts.
- When benefit payments are due, SSA redeems treasury bonds and the payments are made directly by the U.S. Treasury to beneficiaries.
- In any given year, any excess income over benefits payments increases the balance in the trust funds; conversely, excess payments decrease the trust fund balances.
Factors Contributing to the Insolvency Projection
- Benefits must be paid for longer periods: life expectancy for adults reaching age 65 has increased by 7.1% (males) and 8.2% (females)[i] since 1940[ii]. Someone reaching Social Security eligibility now can expect to draw benefits for about 20 years—many more years than the original projections. The full retirement age (FRA) for benefits has not kept pace. Although life expectancy is currently in a period of slight decline, the projection of longer payment periods continues to exist.
- Infant mortality rates have increased[iii], increasing 3% in 2022.
- Birth/fertility rates have dropped considerably since 2007 (-23%)[iv]; the population replacement rate has declined by 19 percent, from 2.1 to 1.7.[v]
- The ratio of taxpaying workers to Social Security beneficiaries continues to drop; now at 2.8:1 and projected to be 2.3:1 by 2035 compared to 41.9:1 in 1945.[vi]
- The labor force participation rate is in a steady decline, falling by more than 5.1% over the past two decades[vii]
- The percentage of total payroll subject to FICA tax has declined from 90% (1983) to 82.5% (current). Loss of tax revenue on 7.5% of total payroll is a major contributor to the insolvency projections.[viii]
Key Performance Indicators
- Payroll tax revenue fell short of total program expenses in 2010.
- Total program expense exceeded total income from all sources in 2021.
- The total 2022 program expenses were $1.244 trillion, and the total incoming revenue was $1.222 ($22 billion deficit).
- The projected 2023 deficit is $53 billion.
- Deficits are projected, under current law, to continue to 2033, at which point the trust fund balances reach zero.
Rumors Related to Social Security’s Alleged “Bankruptcy”
- Full trust fund depletion in 2033 will cause benefits to stop. Realty: Reverting to a cash basis will allow benefits to continue, but at a reduced rate.
- At full depletion, SSA will simply borrow from the U.S. Treasury. Reality: SSA has no borrowing authority under current law.
- Insolvency results from plundering by various government segments, with the funds taken for purposes other than those for which Social Security was originally intended. Reality: Historically, every dollar collected for Social Security since its inception in 1939 can be traced via the annual Trustees Reports available via SSA’s records. These records present a year-by-year account of income and expenses and their impact on accumulated trust fund balances. Every dollar paid into Social Security has either been paid to beneficiaries or currently sits in one of Social Security’s trust funds.
- The “assets” held in the Social Security trust funds are worthless IOUs. Reality: the special issue bonds are backed by the “full faith and credit” of the U.S., which has never defaulted on its Treasury security obligations. The well-regarded National Committee to Preserve Social Security and Medicare (NCPSSM) points out that U.S. Treasury securities are “widely considered by finance industry professionals and foreign governments as the world’s best and safest investment.”[ix]
Much will be forthcoming in the months ahead as the 2024 Presidential election cycle unfolds, and in the months and years ahead as proposals are unveiled to address the solvency problem dilemma. Stay tuned to this website for frequent updates!
[i] https://www.ssa.gov/oact/STATS/table4c6.html
[ii] https://www.ssa.gov/history/lifeexpect.html
[iii] https://apnews.com/article/infant-deaths-us-cdc-mortality-c808796da0415b6ecc0629938421e1b5
[iv] https://www.axios.com/2023/10/04/birth-rate-fertility-rate-decline-data-statistics-graph-2022
[v] https://www.forbes.com/sites/roberthart/2023/06/01/us-population-flatlining-as-birth-rate-stagnates-in-2022/?sh=24979f87131e
[vi] https://www.ssa.gov/history/ratios.html
[vii] https://www.bls.gov/charts/employment-situation/civilian-labor-force-participation-rate.htm
[viii] https://harkininstitute.drake.edu/wp-content/uploads/sites/103/2023/09/Harkin-Institute-Morning-Keynote-2023-0913-FINAL.pdf
[ix] https://www.ncpssm.org/documents/social-security-policy-papers/social-security-is-not-a-ponzi-scheme/