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The Future of the Social Security Trust Fund

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The idea behind Social Security is that, when someone grows old, disabled, or unable to care for themselves for some reason, the money they paid into Social Security during their working years will be returned to them as a monthly benefit, so they are not left without an income. That money is collected in taxes over the years and over recent decades, has been managed and held in a Social Security trust fund until it is needed. Unfortunately, these funds, which have been growing for years, are now required to cover the cost of paying Social Security benefits. Starting in 2020 they will be tapped and they are expected to run dry by 2034. The Board of Trustees overseeing these funds says immediate action is needed to address the impending shortfall.

What are the Social Security trust funds?

The two Social Security trust funds are the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) funds. These hold the assets collected through Social Security taxes to provide for people who qualify for OASI and DI benefits. They also track all the income to the funds through taxes, and disbursements from the funds. The money in the funds can only be used to pay disbursements and program administrative costs. 

OASI pays benefits to retired workers and their families, and to the families of deceased workers. Disabled workers are paid from the DI Trust Fund. In 2017, over $941 billion was paid in disbursements from both funds. In 2018 that number rose to over $988 billion. That is more than $100 billion above what was paid out in 2014. That increase in disbursements, to pay for an aging population that is living longer, is part of the reason the fund is projected to run out. 

Where does SS trust fund money come from?

The money that retirees and disabled people receive as benefits comes primarily from the taxes being paid into the system now by workers—specifically a 12.4 percent tax on a worker’s earnings. Employers pay half of this amount–6.2 percent of earnings–while workers pay the other 6.2 percent. These taxes, from the Federal Insurance Contributor’s Act (FICA), send 5.3 percent to the OASI and .9 percent to the DI. 

FICA is not charged, currently, on a worker’s entire income. There is a cap. For 2019, FICA was only charged on earnings up to $132,900. That amount may be updated every year depending on average wage growth. For 2020, FICA will be charged to earnings up to $137,000. 

Self-employed people have to pay the entire 12.4 percent independently, usually by paying quarterly taxes on the amount they predict they will earn in the upcoming quarter. But, as with other employers, they can deduct the employer portion from their taxable income.

The extra money that is not needed to cover SS benefits goes into the trust funds. The OASI and DI trust funds have had a surplus for several decades; in 2019 the surplus was about $2.9 trillion. However, people are living longer today and the cost of living is rising, pushing up benefit payments, and the generation behind the Baby Boomers—GenerationX—is much smaller. In 1975 there were more than three workers paying taxes to support a single beneficiary, compared to 2.8 workers now. This means that the current tax revenues won’t cover benefits and Social Security will have to tap the surplus.

Tax revenues invested

Currently, the surplus money collected for OASI and DI is invested on a daily basis into securities. In the past, Social Security invested the income into marketable Treasury securities available to the general public. However, markets can be volatile. When you invest in a government bond, you’re predicting what the value will be at maturity, after all interest has been accrued. If someone withdraws the money early, the security may not be worth as much as it would be at maturity and the fund may lose money. For this reason, it was decided that it was safer to create “special issue” Treasury bonds that are only available to the trust funds. Unlike marketable securities, special issues can be redeemed at any time at face value—the value of the security at maturity– so it is similar to holding cash.

When program costs exceed income, the Social Security Administration can redeem its bonds to cover expenses, until it runs out of bonds. Starting in 2020, that is what’s going to happen. 

Taxes on benefits

People who receive an OASI or DI benefit sometimes have to pay tax on part of that benefit if they have significant earnings in addition to the benefit. For many people the measure the IRS uses to determine whether recipients should pay a tax is “combined income” which includes their adjusted gross income, non-taxable interest, and half their SS benefits. 

If you file a federal tax return as an individual, and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits. Or if it is more than $34,000 you may have to pay tax on up to 85 percent of your benefits.

If you file a joint return, the income level for paying on 50 percent of benefits is between $32,000 and $44,000; over that amount, you may owe on up to 85 percent of your benefits may be taxable.

(Checkout our breakdown on Social Security benefits and tax implications)

People who are married and file a separate return usually pay taxes on their benefits.

How have tax changes impacted the SS trust fund 

The cap on the amount of income that is subject to FICA has increased dramatically from nearly $107,000 in 2010 to over $137,000 in 2020. As a result, more tax dollars have been channeled into the funds. 

When President Franklin D. Roosevelt proposed the FICA tax, he never intended for high earners either to contribute nor benefit. But as the proposal worked its way through Congress, that exemption became a cap. At the time the cap was for people earning more than $3,000, or $55,000 a year in today’s dollars. There is no cap on the Medicare portion of the tax, which accounts for 2.9 percent. There is also a cap on how much Social Security beneficiaries can receive per month, although that rises every year with the Cost of Living Adjustment (COLA).

What is the long-term solvency of SS?

At this point, it is believed, there will be enough money generated by wage earners to pay out about 80 percent of the current benefit, which means a drop in the amount beneficiaries will receive.

A Board of Trustees oversees the financial operations of the trust funds. The Board reports annually to the Congress on the financial status of the trust funds and makes projections under three alternative sets of economic and demographic assumptions. Under one of these sets (labeled “Low Cost”) the trust funds remain solvent for the next 75 years. Under the other two sets (the “Intermediate” and “High Cost”), the trust funds become depleted within the next 20 years. The intermediate assumptions in the annual Trustees Report reflect the Trustees’ best estimate of future experience.

How does the Social Security trust fund failure affect decisions on when to take benefits? 

Obviously, no one knows what will happen between today and 2034 that may alter the future of Social Security. One expert has said the government could make small changes over time, such as reducing the Cost of Living Adjustment, to prolong the life of the trust funds. On the other hand, if the political winds shift from 2019 toward a more liberal or socially progressive platform, stronger measures may be taken to replenish the trust funds, such as removing or significantly raising the cap on taxation.

Typically, it is believed one should wait until age 70 to begin collecting Social Security to gain the maximum benefit.  A  person who retires at 60 rather than 67 would lose 30 percent of their benefit, so that would be a greater loss in drawing SS early than in losing 20 percent of the benefit later, especially since they would have been receiving the full amount for a number of years.

Fixes that will be required

Among the remedies being considered are raising the payroll tax from 12.4 percent to up to 18 percent over the coming decades. There are various schemes for this. Another option is to raise the payroll tax in conjunction with significantly raising or removing the cap on income for FICA taxes. Other options include raising the retirement age or changing the formula so that lower income people would receive a higher percentage of their lifetime income than those with higher incomes. 

The Board of Trustees recommends action sooner rather than later to avert the worst outcomes, especially for lower income wage earners.