By Joe Bishop-Henchman and Andrew Lautz, National Taxpayers Union
Social Security’s trust funds will be out of money one year earlier than previously projected, according to the latest annual financial report by the program’s trustees. This year’s report, released March 31, finds that the Social Security trust fund will be depleted in 11 years, one year earlier than trustees projected last year – 2034 instead of 2035. The main trust fund, the Old Age and Survivors Insurance (OASI) fund, will be exhausted in 2033. At that point, unless lawmakers act, all current and future Social Security beneficiaries would face an across-the-board 20-percent cut in benefits.
Inflation is one cause of this financial deterioration. According to the trustees, inflation has contributed to downward revisions in GDP and labor productivity over the next decade. This, in turn, affects the short- and long-term health of Social Security by affecting the size of the U.S. workforce, and U.S. wages and income (taxes on which pay for current Social Security benefits). Inflation itself has affected the near-term financial health of the Social Security program, leading to higher-than projected benefit payments (since Social Security benefits are adjusted annually for inflation) but also higher-than-projected payroll tax revenues (due to wage increases in the domestic economy).
However, this news is not truly news: for decades, Social Security trustees have consistently warned the program would exhaust its reserves in the 2030s. (In their 1995 report, for instance, they put the target date at 2030, then a far-off 35 years away.) Social Security’s underlying finances – current benefits are paid by current workers – and demographic forces drive much of the challenge. Social Security has annually paid out more in benefits ($1.24 trillion this year) than tax revenue collected ($1.16 trillion this year) since 2010, and now costs also regularly exceed interest revenue credited to the program (another $66 billion this year). This trend shows no reversal in sight: by 2034, revenues will only be able to pay 80 percent of promised benefits, and by 2097, only 74 percent.
For now, this annual gap is covered by drawing down Social Security’s accumulated reserves, which currently stand at $2.83 trillion. (These reserves, mostly in the form of U.S. Treasury bonds, are redeemed by the federal government borrowing more.) At the projected rates of drawdown, the trustees calculate that a decade from now the reserve will be only $590 billion. It would be gone entirely in 2034. Setting aside the DI trust fund – which is much smaller than the OASI trust fund but on its own is projected to be solvent for the next 75 years – the OASI trust fund on its own is projected to be depleted one year earlier, in 2033.
The trustees also underscore the scale of the problem and the task ahead for lawmakers in addressing projected shortfalls in the Social Security program.
- If Social Security were to have a reserve fund to handle program shortfalls, it would need to be much larger than current reserves. The unfunded gap for the next 75 years is the present-day equivalent of $22.4 trillion. U.S. GDP in 2022 was $25.6 trillion. Put another way, over the next 75 years Social Security currently expects to pay out $112 trillion in benefits to existing and future retirees, far short of the $87 trillion in tax revenue to be paid by current and future workers.
- Closing the gap with an immediate across-the-board payroll tax increase would require a rate of 15.84 percent, up from 12.4 percent now (6.2 percent paid each by employer and employee). This 28 percent tax increase would mean an extra $860 in taxes for a worker making $50,000 a year.
- Raising taxes only on high-earners by lifting the payroll tax cap would impact fewer people, but the $100 billion in added revenue would be far short of closing the gap, even if benefits were not increased (currently, your benefit amount is tied to the taxes you paid in).
- If lawmakers wait until 2034 to address the issue, they would have to increase payroll taxes by 4.15 percentage points (2.075 percent each for worker and employer). That’s a 33.46 percent increase, and for a worker making $50,000 per year would mean an extra $1,037.50 in taxes per year.
- Addressing the 75-year shortfall with benefit cuts alone would be equally destabilizing: doing so in 2023 would require a 21.3 percent benefit cut for all current and future beneficiaries, equal to a $361 per month cut, while waiting to cut benefits across the board until 2034 would require a 25.2 percent cut equal to $427 per month (based on current average monthly benefit amounts).
Key policymakers in both major parties have recently pledged not to do anything that could affect Social Security benefits. President Biden recently backed off earlier proposals to improve Social Security program finances with tax increases on high-income Americans. Former President Trump, a leading contender for the Republican nomination for president in 2024, has told Republicans not to “cut a single penny from Medicare or Social Security.” And the most powerful elected Republican in office, Speaker Kevin McCarthy (R-CA), recently said that Social Security should be “completely off the table” in debt ceiling discussions.
Unfortunately, not having a plan to address Social Security solvency is tantamount to supporting a drastic, across-the-board benefit cut in 2034. When the trust fund is depleted, Social Security will only be able to fund benefits from current income, which in 2034 would amount to 80 percent of benefits. That’s an immediate, 20-percent cut for all beneficiaries, which would be especially disruptive to low-income seniors relying on the program to meet basic needs.
The year 2034 may seem far away, but it will realistically take policymakers years to hash out a compromise that extends Social Security’s solvency. More concerning, next year’s trustee report could move the date of trust fund insolvency up even closer to the present, especially if the U.S. economy takes a turn for the worse or inflation continues to run higher than policymakers’ target levels. Lawmakers should begin the bipartisan work of shoring up the program’s finances now, not in 2033 or 2034.
Joe Bishop-Henchman is the Executive Vice President at National Taxpayers Union Foundation. Andrew Lautz is the Director of Federal Policy for National Taxpayers Union and National Taxpayers Union Foundation.