Social Security kept more than 26 million Americans out of poverty in 2021, making it the nation's most important antipoverty initiative, according to the Census Bureau. But the Social Security program also ran a $56 billion deficit that same year, so the cost of paying benefits far exceeded funding from payroll tax and interest income.
So what? That deficit took a bite out of the Social Security trust fund (i.e., the source of Social Security benefits), and the Board of Trustees says the problem will persist indefinitely unless changes are made to the program. That means the Social Security trust fund balance will shrink each year until the asset reserves are eventually depleted.
Given the complex nature of the variables involved, it's impossible to predict the exact year of insolvency. But the Board of Trustees believes it will occur between 2031 and 2069, with its best guess being 2035. That means lawmakers in Washington may have less than a decade to find a solution.
Here's what retired workers should know.
The Social Security program won't disappear
Many Americans are worried about the future of Social Security. In fact, 33% of adults not currently receiving benefits believe they will never see a dime from the program.
That particular fear is overblown. Revenue from payroll taxes will cover 80% of scheduled benefits in 2035, even if the trust fund is depleted by that time, according to the Board of Trustees. That means the Social Security program isn't going to disappear.
Social Security is the major source of income for most retired Americans, so a 20% pay cut would still be problematic. But government officials are well aware of the situation, and politicians have already proposed a broad continuum of potential solutions.
Increasing revenue from payroll taxes could delay trust fund insolvency
Broadly speaking, there are only three ways to avoid trust fund insolvency. The Social Security program can increase revenue, cut costs, or decide on some combination of those two options. Not surprisingly, many politicians would prefer to increase funding rather than cut benefits. While there are multiple ways to do that, the most common proposal involves applying the 12.4% Social Security payroll tax to a greater portion of total income.
For context, the maximum taxable earnings limit is $160,200 in 2023, so any income above that threshold isn't taxed by the Social Security program. According to the Social Security Administration, about 6% of workers make enough money to exceed the taxable limit, and their collective earnings account for roughly 19% of total income in the U.S. In other words, the Social Security payroll tax is currently applied to 81% of all income, leaving room to boost revenue for the program by taxing high earners more heavily.
In 2021, Representative John Larson (D-Conn.) introduced a piece of legislation known as Social Security 2100: A Sacred Trust. Among other changes, the bill proposes applying the 12.4% payroll tax to all earnings above $400,000. But some lawmakers want to be even more aggressive.
For instance, in 2022, Rep. Peter DeFazio (D-Ore.) and Sen. Bernie Sanders (I-Vt.) introduced the Social Security Expansion Act. That piece of legislation would apply the 12.4% payroll tax to all earnings above $250,000.
Both bills would create a doughnut hole between the specified income threshold (i.e. $400,000 or $250,000) and the taxable limit. But that gap would close over time because the taxable limit rises each year to keep pace with changes in general wage levels. In other words, all income would eventually be subject to Social Security payroll tax.
Those changes alone wouldn't solve the problem
According to the Office of the Chief Actuary, if the 12.4% payroll tax was applied to income above $400,000 starting in 2024, trust fund depletion would be delayed until 2048. Similarly, if the 12.4% payroll tax was applied to earnings above $250,000 starting in 2023, trust fund depletion would be delayed until 2063.
Taxing a greater portion of income is a good start, but it wouldn't prevent trust fund insolvency, at least not by itself. Lawmakers will need to take other steps to ensure benefits remain payable in their entirety, and the long-term solution will likely involve a blend of boosting revenue and cost-cutting measures.
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