How Secure Is Social Security?

Some lawmakers have predicted bankruptcy for Social Security, pushing cuts in benefits or even privatization of the program to ensure its survival. What’s more, the latest (2021) annual report from the Social Security Board of Trustees suggests things have weakened with Social Security since the start of the COVID-19 pandemic. However, there might be some silver linings.

What Is Social Security?

The entire program managed by the Social Security Administration (SSA) is known as Old-Age, Survivors, and Disability Insurance (OASDI) Program. Note there are two funds: one for retirees—the Old-Age and Survivors Insurance (OASI) Trust Fund—and one for those with disabilities—the Disability Insurance (DI) Trust Fund. The financial status of each is in a very different position, with different possible solutions to fix the financial problems.

Social Security was designed during the Great Depression as a safety net to be sure that we never again find seniors living under bridges, as was common then. It was designed as insurance, and Social Security payments are called “benefits.” 

How Does Social Security Pay the Benefits?

Social Security benefits are based on a pay-as-you-go system. That means current workers pay Social Security taxes, while current retirees get benefits based on that tax revenue and earned income from the trust fund bonds. 

The concern related to that pay-as-you-go structure is that the huge baby boomer generation (people born between 1946 and 1964) will create a crisis because so many will begin collecting Social Security. By the year 2031, when the youngest boomers reach age 67, there will be 75 million people over the age of 65, nearly double the 39 million who were that age in 2008. This will change the ratio of retirees collecting benefits to workers paying into the system.

The beneficiary-to-worker ratio is expected to rise from 35 per 100 in 2014 and reach 44 per 100 in 2030, putting a strain on that pay-as-you-go system. 

Greenspan Commission

This baby boomer wave was not unexpected; in fact, it was planned for in 1983, when Alan Greenspan headed the National Commission on Social Security Reform, also known as the Greenspan Commission. At that time the trust funds almost did run out of money. The commission found fixes to deal with the boomer wave.

One of the biggest changes was accelerating scheduled increases in Social Security tax rates, to build up the trust funds. In 1983, the tax rate was 5.4% for employees and another 5.4% for employers. The commission proposed hiking it to 5.7% beginning in 1984, then 6.06% in 1988, and 6.2% in 1990 (where it currently stands).

Today’s Social Security Finances

The Greenspan Commission’s fix worked just as intended, and the nation has billions in the Social Security trust funds. The 2021 annual report on the trust funds showed these basic facts: 

• The OASDI trust funds held $2.9 trillion at the end of 2020.
• Total expenditures for 2020 were $1.11 trillion, and total income was $1.12 trillion.
• Collectively, OASDI trust fund reserves will be depleted in 2034, one year sooner than estimated in the 2020 report.
• The depletion dates are different for the two funds. OASI trust funds are estimated to run out in 2033, and DI reserves in 2057. In the 2020 report, DI reserves were projected to run out in 2065.
• When OASI trust funds are depleted in 2033, only 76% of Social Security benefits will be able to be paid based on the pay-as-you-go income to the OASI trust fund.
• When DI funds are depleted in 2057, if there is no fix in time, 91% of disability benefits will be able to be paid based on the pay-as-you-go income to the DI trust fund.

Possible Fixes

Yes, a fix is needed to avoid a reduction in benefits when the trust funds run out of money. Many different fixes have been suggested to restore Social Security’s financial health for the next 75 years. A tax increase is not the only way. It is most likely that some combination of the fixes will be used to minimize the impact on everyone.

Raise Taxes

To remain fully solvent over the next 75 years, payroll taxes would have to rise by 3.46 percentage points to 15.86% to correct the actuarial deficit. At the moment, the rate is 12.4%, with 6.2% coming each from workers and their employers.

Raise the Income Limit

There’s a cap on how much income that’s taxable to fund Social Security; in 2021, it’s the first $142,800 of earnings, and for 2022, the cap is $147,000.

According to a Congressional Research Service report updated Sept. 2, 2020 (and based on 2020 statistics), eliminating the payroll cap while leaving in place current rules for capping benefit calculations would eliminate 73% of the projected 75-year shortfall.

Change Cost-of-Living Adjustment Calculations

In some years, the Social Security Administration increases benefits to keep pace with rising prices or inflation. The increase is called a cost-of-living adjustment (COLA), which for 2021 was 1.3%, and for 2022, is 5.9%.

However, there was no COLA in some years, such as 2016, which means COLAs may not be an effective long-term fix.

Raise the Full Retirement Age

In 2021 the full retirement age for baby boomers is 66, and for those who were born in 1960 or after, it is 67. Some have suggested that it be increased to 69 or 70. 

Invest Funds in the Stock Market

Some people want the Social Security Administration to invest some of the trust fund money in the stock market to get a better return. Of course, the problem with this is excessive risk. 

The Bottom Line

If there is no fix in the next 20 years, reduced benefits could be still paid with pay-as-you-go tax revenue. However, the sooner Congress does pass a fix and makes Social Security solvent, the better it will be for all of us.