The Social Security trust fund is running out of money

26 August 2020

The impending depletion of the Social Security trust fund should concern everyone. It will affect those who are already retired or who will retire soon the most, but younger people who are paying into Social Security now deserve to know what benefits they will receive when they reach retirement age.

The Social Security trust fund is projected to be depleted by 2035 at the latest. At that point, Social Security checks will not completely stop, but they will be reduced by 20% to 25% unless something changes. Congress has known about this for decades, but has done almost nothing about it. The longer action is put off, the more painful the impact will be.

Clearly, something should be done. Seniors who depend on Social Security as their only source of income would have a much harder time surviving if their checks were suddenly reduced substantially.

Unfortunately, there is no magic pot of money anywhere to solve the problem. We can only do one or more of the following things:

Raise the “taxable maximum” wage so that high wage earners (and their employers) pay Social Security on more of their earnings.
Increase the individual Social Security tax rate.
Increase the employer’s portion of the Social Security tax rate.
Reduce Social Security benefits paid to retirees.
Raise the retirement age.
Increase the pool of workers paying into Social Security via legal immigration.
Invest in better education for our children so that their wages (and therefore their payroll taxes) will be higher. (Of course, this would be a good idea even if it had no impact on Social Security.)

Any combination of these actions will be painful, but doing nothing would be even more painful. The best approach would be to implement a combination of several or all of these strategies, but phase in any reduction in benefits so that workers have a good long time, perhaps even up to a couple of decades, to prepare for the reduction. In the future, workers will simply have to save a bit more for their own retirement. Workers must understand that Social Security was never intended to be the sole source of income for retirees.

By structuring Social Security the way that it has, Congress has made an implicit promise to workers that it cannot keep. The promise is that if workers and employers contribute at the current rate, then workers will be able to retire with full benefits at full retirement age as currently defined, and that this arrangement will continue into the indefinite future. Unfortunately, there is not enough money available in the current system to make all of this happen. As a society, we must choose how we will change this promise so that the Social Security system can continue into the future.