Busting the myth of Social Security insolvency

Year after year in its annual reports, the Social Security Board of Trustees has been forecasting that the Social Security trust fund is on track to be depleted in the 2030s. More recently, rumors predicting the impending demise of the Social Security system have gotten louder. As a result, some Americans now believe that benefit payments will end abruptly in about seven years.

The truth is that Social Security is not going away. The system will, however, need some big changes that could include cuts to benefits. If you’ve paid into Social Security your whole working life (and want to get back as much as you can), here’s what you need to know about how the system works, what led to the current financial condition and what changes have been proposed.

Cash in, cash out

Unlike most government programs, Social Security is self-funded. It takes in revenues from dedicated sources and uses those funds to make payments to beneficiaries. One advantage of that self-funded structure is that the system doesn’t depend on Congress to authorize funding every year. But it also doesn’t have access to any other federal funds. If revenues collected in any given year exceed benefit payments, the surplus is retained in the Social Security trust fund. On the other hand, if benefit payments exceed revenues collected, it can’t borrow from the government’s general revenue coffers. Any shortfall that can't  be covered by the trust fund can't be paid.

1980s: Fending off the first deficit

Every year, the Social Security board of trustees releases a report that presents the current financial condition of Social Security and that includes projections for the following 75 years. In the early 1980s, the trustees forecasted that the system soon would face annual deficits and that, barring changes to address them, benefits would be cut. At the time, the system took in revenues only from payroll taxes.

In response, Congress passed legislation that made sweeping changes to the system, including raising the payroll tax rate, gradually increasing the full retirement age and establishing an additional revenue source: an income tax on benefits paid. Because those changes led to annual surpluses in subsequent years, they also allowed for a third revenue source interest on assets in the Social Security trust fund. As a result of all the changes, the balance in the Social Security trust fund climbed to nearly $3 trillion by the end of 2020.

1990s: Highlighting the flaw in the fix

The large-scale changes made in the 80s were intended to make the Social Security system sustainable for the long term. However, some years later the trustees again began warning Congress that the long-term stability of Social Security was in jeopardy. Why? The intended fix was based on some incorrect assumptions, including that wages would grow relatively evenly across income levels and that the decline in U.S. fertility rate would level off at 2.0 children per woman.

Most wage growth since the 80s has been concentrated at the higher end of the spectrum, which matters because there’s a cap on the total amount of income subject to Social Security tax each year. The higher someone’s income, the sooner in the year they will reach that cap. In the early 80s, about 90% of all wages were subject to the payroll tax; today that’s closer to 83%.

Additionally, the fertility rate did not stabilize at 2.0, but continued to fall due to a range of demographic trends and in particular after the Great Recession. The rate is currently around 1.6.