When Will Social Security Run out of Money?

If you have been paying attention to the news, you’ve probably heard politicians talk about how entitlement programs are unsustainable and the need to make significant cuts in the future to keep them solvent. As our recent article shows, there is strong desire from the GOP led Congress to gut programs like Social Security and Medicare to help pay for the recent tax cuts and also reduce the federal deficit. So, the real question that needs to be answered is - Will Social Security Really Run Out of Money?

The short answer is that as long as people continue to work and pay taxes, Social Security will not run out of money. However, whether the Social Security program will be able to pay out 100% of benefits is not guaranteed. That depends on how much in tax revenue the government receives. Here’s why:

Currently, the Social Security system brings in enough money each year to cover about three-quarters of the benefits it pays out. To make up the difference, the government dips into what is called the Social Security Trust, which is a surplus that was built up when taxes collected exceeded benefits paid out. Once the Social Security Trust runs out of money, the Social Security system will only be able to payout the 75% of the benefits to recipients (which means it will only be able to payout what it collects through the payroll Federal Insurance Contributions Act, or FICA taxes)

So, when you hear politicians talk about the Social Security system running out of money, that is a gross exaggeration. The system is not going to zero. What they mean is that the system is going to 75% - that is, it will only be able to payout 75% of benefits if the Trust Fund runs out of money.

According to a recent report by the Social Security Administration, the trust is on track to be run out of money in 2034. The non partisan Congressional Budget Office estimates that the Trust could run out of money as early as 2025. Should that happen, the Social Security Administration estimates that the system will only be able to pay 79% of benefits from payroll tax revenue. Should the situation not improve, they project that in 2089, they will only be able to payout 73% of benefit amounts.

Why is the Trust running out of Money?

There are a number of reasons why the Social Security system is only not collecting enough tax revenue to cover 100% of payouts, and why it has to dip into the Trust Fund to make up the difference. The first one is that people are living longer, so retirements are lasting longer, which means the Social Security System is having to pay retirees their benefits for a longer period than before. Another reason is that there is a smaller smaller working-age population and an increase in the number of retirees (baby boomers). For example, by 2035, the number of Americans 65 and older will increase from about 48 million today to more than 79 million.

If more people are taking money out of the system but fewer people are paying into Social Security, then the Social Security Trust Fund is going to continue to shrink, unless something is done to fix the problem. There are several ways Congress can address this problem. The options include increasing the retirement age to say 70 years, cutting benefits, raising payroll taxes, raising the income threshold and or reducing the annual cost of living adjustment (COLA) or a combination of these options.

March 21, 2018