Orlando Harmon
Social Security in the US is facing a funding crisis, with projections showing that the program will run out of money by 2035. This is due to a combination of factors, including the aging population, increasing life expectancy, and a slowdown in workforce growth, which has resulted in fewer payroll tax contributions. If no action is taken, Social Security will be unable to pay full benefits to retirees, disabled people, and their families, leading to a significant increase in poverty rates, especially among older adults and people with disabilities. Congress has proposed various solutions, including increasing payroll taxes, means-testing benefits, and eliminating the annual cap on taxable income. However, the longer it takes to implement a solution, the more difficult and painful it will be to resolve the funding crisis.
| Characteristics | Values |
|---|---|
| Social Security fund projected depletion date | 2033, 2035, 2036, 2037, 2038 |
| Social Security fund depletion impact | Increase in poverty among older adults, people with disabilities, and their families |
| Social Security fund depletion prevention | Congressional action, legislative fix, changes to benefits and revenue sources |
| Social Security funding sources | Payroll taxes, income taxes on benefits, investment income |
| Social Security funding challenges | Insufficient tax revenue, rising program costs, slow workforce growth, aging population |
| Social Security benefit eligibility | Age, income, work status, disability status |
| Social Security program history | Established in 1935, amendments in 1950, 1957, and 1983 |
| Social Security trust funds | Old-Age and Survivors Insurance (OASI), Disability Insurance (DI), Hospital Insurance (HI) |
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What You'll Learn
The Social Security Act: signed into law in 1935
Social Security taxes in the United States amount to 12.4% of wages up to a cap on taxable annual income, which was set at $168,600 in 2024. Employees and employers each pay 6.2% of the total, while self-employed individuals pay the entire 12.4% but can deduct half from their taxable income. This money goes into the Social Security trust funds, which use them to pay benefits.
The Social Security Act, signed into law by President Franklin D. Roosevelt on August 14, 1935, established a system of Federal old-age benefits, enabling states to provide better for aged persons, blind persons, dependent and crippled children, maternal and child welfare, public health, and the administration of their unemployment compensation laws. It also established a Social Security Board and raised revenue.
The Act was proposed by Roosevelt in January 1935 as a more practical alternative to the Townsend Plan. It was expanded during congressional debate to provide payments to widows and dependents of Social Security recipients. Despite this, many job categories were not covered by the Act, including agricultural and domestic workers, government employees, and teachers, resulting in 65% of the African American workforce being excluded from the initial program.
The Social Security Act was the first time the federal government took responsibility for the economic security of the aged, the temporarily unemployed, dependent children, and the handicapped. It has been amended significantly over time, including the introduction of cost-of-living adjustments, which placed the program on the road to universal coverage. The Old-Age Reserve Account, previously established under the Act, was replaced by the Federal Old-Age and Survivors Insurance Trust Fund, administered by a Board of Trustees.
The Social Security program has contributed to a dramatic decline in poverty among older people, and spending on it has become a significant part of the federal budget. However, it is projected to run out of money by 2033 as payroll taxes no longer fully cover the benefits paid out.
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Old-Age, Survivors, and Disability Insurance (OASDI)
The Old-Age, Survivors, and Disability Insurance (OASDI) program, commonly known as Social Security, is a federal system that provides income support to retirees, disabled people, and their families. It is the largest such system in the world and the biggest expenditure in the federal budget, costing around $1.4 trillion in 2024. The OASDI program provides monthly payments to qualified retired and disabled workers, their dependents, and survivors of insured workers. Eligibility and benefit amounts are determined by the worker's contributions to Social Security. There is no means test to qualify for benefits, but there is a limit on income earned from working for those under the full retirement age.
The OASDI program is funded through payroll taxes, known as FICA taxes (Federal Insurance Contributions Act) and SECA taxes (Self-Employed Contributions Act). Social Security taxes amount to 12.4% of wages up to a cap on taxable annual income set at $168,600 in 2024. Employees and employers typically split the tax contributions equally, with each paying 6.2%. However, self-employed individuals pay the full 12.4% tax rate, although they can deduct half of this amount from their taxable income.
The OASDI program aims to partially replace income lost due to old age, the death of a spouse, or disability. Payments are calculated based on individuals' past wages earned, with the goal of providing income support to those who need it. For old-age payments, money is paid out to qualifying persons starting as early as age 62, with full retirement age depending on the individual's birth date. Those who wait until age 70 to begin collecting benefits receive higher maximum benefits due to delayed retirement credits.
Survivors' benefits are payable to surviving spouses or dependents of deceased workers, including children and widows/widowers caring for a deceased worker's child who is under age 16 or disabled. Disability payments, on the other hand, are made to eligible individuals who are no longer able to participate in substantially gainful activity and who meet additional criteria. To qualify for retirement benefits, a worker must be fully insured by accumulating credits or quarters of coverage.
While the OASDI program has been crucial in providing financial support to millions of individuals, there have been concerns about its long-term solvency. Social Security benefits are funded by current tax revenues and any accumulated surplus, and if program costs exceed tax revenues, the trust funds that finance the benefits may deplete over time. According to projections, the OASDI program's cash reserves are expected to face shortfalls and may run out by 2033 unless legislative changes are enacted.
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Insolvency: Social Security's cash reserves projected to run out by 2033
Social Security benefits are funded by a dedicated payroll tax, known as the Federal Insurance Contributions Act (FICA) tax, paid by employees, employers, and the self-employed. Employees and employers each pay 6.2% of the tax, adding up to 12.4% in total. Self-employed individuals pay the entire 12.4% themselves.
Social Security's cash reserves are projected to run out by 2033. This projection is based on the fact that payroll taxes are no longer fully covering the benefits paid out. According to the Social Security Administration, the fund reserves that help pay for Social Security benefits will be depleted by 2035, a year later than the projected date in their 2023 report. Without congressional intervention, retirees would then only be able to receive 83% of their full benefits.
The Old Age and Survivors Insurance Trust Fund, which pays retirement and survivor's benefits, isn't the only Social Security fund projected to deplete its reserves. The trustees' 2024 report also predicted that the Hospital Insurance (HI) Trust Fund, which finances Medicare Part A, will be depleted in 2036.
The Social Security program has faced financial challenges in the past, and bipartisan legislation has been successful in addressing them. For example, in 1983, legislation increased the full retirement age from 65 to 67 and instituted an income tax on Social Security benefits. Similarly, Congress now has over a decade to act and shore up Social Security's finances, and lawmakers continue to generate proposals.
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Trust funds: assets required to pay benefits
The Social Security Trust Funds are the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds. These funds are accounts managed by the Department of the Treasury. The solvency of the Social Security program is defined as the ability of the trust funds to pay the full scheduled benefits in the law on a timely basis.
The OASI and DI Trust Funds, along with the Hospital Insurance (HI) Trust Fund of the Medicare program, have the feature that benefits can only be paid to the extent that the trust funds have assets to draw on to pay the benefits. The existence of assets over time in the future is, therefore, the critical indicator of solvency. The 2009 Trustees Report projected that the combined assets of the OASI and DI Trust Funds will peak at over 350% of the annual cost of the program, but will then decline, reaching exhaustion in 2037.
The OASI and DI Trust Funds serve two purposes: they provide an accounting mechanism for tracking all income to and disbursements from the trust funds, and they hold the accumulated asset reserves. These accumulated reserves provide automatic spending authority to pay benefits. The Social Security Act limits trust fund expenditures to benefits and administrative costs. Benefits to retired workers and their families, and to families of deceased workers, are paid from the OASI Trust Fund, while benefits to disabled workers and their families are paid from the DI Trust Fund. Benefit payments accounted for about 99% of the total cost of the combined OASI and DI funds in the calendar year 2023.
Money to cover program costs (mainly benefit payments) from the trust funds comes from the redemption or sale of securities held by the trust funds. When "special-issue" securities are redeemed, interest is paid. The principal amount of special issues redeemed, plus the corresponding interest, is just enough to cover the required cost. Money flowing into the trust funds is invested in US Government securities.
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Payroll taxes: contributions from employees, employers, and the self-employed
Social Security benefits are funded by a dedicated payroll tax paid by employees, employers, and the self-employed. Social Security taxes amount to 12.4% of wages up to a cap on taxable annual income, which was set at $168,600 in 2024. Employees and employers split the tax contributions equally, with each paying 6.2%. Self-employed individuals pay the entire 12.4% but can deduct half of that from their taxable income as an above-the-line adjustment. These taxes are deposited into the Social Security trust funds, which use them to pay benefits.
The Social Security trust funds, including the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund, are unique in that they cannot borrow money to continue paying benefits when dedicated taxes and reserves are insufficient. Therefore, their ability to pay benefits is directly dependent on the availability of assets in their respective trust funds.
The Hospital Insurance (HI) Trust Fund, which finances Medicare Part A, is also projected to deplete its reserves by 2036. This depletion is primarily due to the rising cost of the program, which will exceed tax revenues dedicated to the trust funds.
To address the projected funding shortfall, Congress has proposed various solutions, including means-testing benefits and eliminating the annual cap on income subject to Social Security taxes. However, the longer it takes to implement a solution, the more challenging the situation becomes.
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Frequently asked questions
Social security is taking more money out for insurance because there is a projected long-term funding shortfall of 3.5% of taxable payroll. The Social Security Act was created as a contributory old-age insurance plan, and the cost has risen over the years. The program is funded through the Federal Insurance Contributions Act (FICA) tax, a dedicated payroll tax.
The Social Security program is projected to run out of money by 2033, with the combined retirement and disability trust fund expected to be depleted by 2035. This will result in a reduction of benefits by more than 20% unless Congress enacts a legislative fix.
One of the main factors is the increasing number of beneficiaries due to the aging population and longer life expectancies. Additionally, there is a slower growth in the workforce, with fewer workers contributing to Social Security per beneficiary.
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