Social Security is the most significant public program for retirement security in the United States. Ninety percent of Americans who are 65 and older receive benefits from the program, which provides an average of nearly 40 percent of their income. Social Security provides at least 90 percent of their income for one in four seniors.
|Questions to consider:
At the end of 2019, the program provided benefits to about 64 million retirees, survivors of deceased workers, disabled workers, and dependents—almost one in five Americans. Social Security has historically received more in payroll taxes and interest income than it pays out in benefits, but as more Americans are retiring and living longer, this is projected to change soon. While not imminently facing insolvency, Social Security does face long-term financial viability challenges unless changes are made.
Social Security is designed to be a pay-as-you-go system. Benefits paid currently are supported by payroll taxes from current workers, who later retire and then collect benefits paid by tomorrow’s workers. Payroll taxes today comprise 89 percent of Social Security’s income, with the remainder coming from taxes on Social Security benefits and investment earnings on its trust funds. Demographic shifts—including Americans living longer and having fewer children, which will translate into fewer workers supporting each beneficiary over the next several decades—are challenging Social Security’s long-term sustainability. In 2019, there were 2.8 workers supporting each beneficiary; this ratio will decrease to 2.3 workers by 2035.
Social Security has two trust funds—the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) funds. The combined OASDI trust fund totaled $2.9 trillion at the end of 2019, according to the most recent Social Security Trustees Report. The OASI trust fund that pays benefits to retirees and their dependents is projected to run out of surplus assets in 2034. The smaller DI trust fund reserves are not projected to be depleted until 2065.
Since the program began, the payroll tax rate has risen over time. However, Social Security’s trust funds have been drawn down and used mainly as a buffer against short-term fluctuations in income and expenses. In 1983, Congress adopted changes that included gradually increasing the tax rate to its current level of 6.2 percent of wages paid by the employer and the employee beginning in 1990. The income exceeded outgo, so the trust funds could grow to pay off higher costs later. The Social Security Trustees Report is issued annually and contains 75-year financial projections of the expected income, benefit payments, and expenses. With these changes, it was expected that the system would be solvent for 75 years (through 2058), but larger benefit disbursements and lower payroll taxes have led Social Security’s trustees in their latest report to estimate that the trust fund reserves may be depleted around 2035. This does not mean that Social Security is “going broke.” After 2035, existing payroll taxes would still support payment of 79 percent of scheduled benefits, declining to about 73 percent over time, if changes aren’t implemented.
Various proposals have been made that would affect Social Security’s financing and benefits. The sooner a solution is implemented to ensure the sustainable solvency of Social Security, the less disruptive the required solution will need to be. It will be relatively easier to come up with solutions now that can be phased in, and a solution would enable beneficiaries to plan ahead better. Yet, thus far, Social Security has not received the focus during recent federal electoral campaigns that its importance warrants, especially in light of the need to act in the near term to address Social Security’s long-term financial sustainability.
The 2020 Social Security Trustees Report does not reflect the COVID-19 pandemic and states that the magnitude of near-term and long-range effects on the population and economy is unclear. For example, payroll tax revenues will decline in 2020, which will have a detrimental impact on Social Security financial projections and would likely change some of the numbers in this guide. Such potential effects of the pandemic illustrate a need to consider Social Security reforms in the near term so that a wider range of options that might provide a more gradual approach to benefit or revenue changes can be considered.
Additional Resources From The Academy