According to the 2018 annual report of the Social Security Board of Trustees, the trust funds that disburse retirement, disability and other Social Security benefits will be depleted by 2034. That does not mean Social Security will no longer be around; it means the system will exhaust its cash reserves and will be able to pay out only what it takes in year-to-year in Social Security taxes. If this comes to pass, Social Security would be able to pay about 77 percent of the retirement benefits to which workers are entitled, and 96 percent of disability benefits.
The money in the trust funds — one for “Old-Age and Survivors Insurance” (the official name for benefits paid to retirees and their families) and one for disability benefits — comes from three sources:
- 88 percent from the 12.4 percent Social Security tax paid on most American workers’ earnings, through FICA payroll taxes (and employer matches) or the SECA taxes paid by self-employed people through their IRS returns.
- 4 percent from income taxes Social Security recipients pay on their benefits.
- 9 percent from interest on the money in the trust funds.
The trust funds had $2.9 trillion in reserves at the end of 2017, but benefit payments going out are increasingly outstripping income, thanks to demographic and actuarial trends. While the boomers are swelling the ranks of retirees (and living, and collecting benefits, longer), lower birth rates in subsequent generations mean there are fewer workers paying into Social Security.
The upshot is that if no changes are made, the system will run through its reserve assets by 2034. For years, lawmakers and policy experts have been debating proposals to shore up Social Security’s finances, most falling into two broad categories: changing tax policies to steer more money into the trust funds or tinkering with the benefit formula to reduce costs (or some combination of both). AARP’s “The Future of Social Security” report summarizes a dozen of the ideas generating discussion in Washington.
Keep in mind
- FICA and SECA taxes also generate a revenue stream for Medicare, which flows into the trust fund that finances Medicare Part A (hospitalization coverage). As detailed in the 2018 Medicare trustees report, that fund is under much the same pressure as the Social Security trust funds due to demographic trends and rising costs.