Is Social Security Running Out of Money?
Is Social Security Running Out of Money?

By Anne Johnson

The Build Back Better bill that Congress sent to the Senate had several social reforms. It proposed more spending on Medicaid and offered hearing benefits through Medicare. But Social Security wasn’t mentioned. When the Senate passed the Inflation Reduction Act, it also didn’t address Social Security.

Social Security is running out of funding. The Social Security Board of Trustees 2021 report projected that by 2035, retirees would start receiving a reduced benefit. By not addressing the problem, Congress and the Senate left it open-ended. But how did this lack of funding happen? And what can be done to keep Social Security from going under?

How Social Security Is Funded

Most people know that employees and employers pay Federal Insurance Contribution Act (FICA) taxes as payroll deductions. The FICA tax rate for 2021 and 2022 was a 12.4 percent split between the employee and employer. But where does this pool of money go once the government receives it?

The Social Security Trust Fund holds Social Security payments until the Treasury Department pays them out. But these funds don’t sit in a pool waiting to be spent. By law, income from the trust must be invested daily. Moreover, the investment must be in securities that guarantee both principal and interest.

All securities held by the trust must be “special issues” of the U.S. Treasury. In addition, the Social Security Trust Fund holds marketable Treasury securities. These are also available to the general public.

They are different from marketable securities. The Social Security Fund doesn’t want to purchase marketable securities because they are subject to the open market and may suffer loss or gain if sold before maturity.

Since these are U.S. Treasury securities, it is loaning the Social Security Fund to the federal government.

But although a conservative investment, the 12 monthly interest rates earned in 2021 for these U.S. Treasury “special issues” was 1.396 percent. The average inflation rate in 2021 was 7 percent.

The redemption of these securities sales is supposed to cover the program cost.

Social Security Projected Shortfall

Since Social Security’s inception in 1935, the government has always made payments in a timely and complete manner. In 2021, 65 million Americans received monthly Social Security benefits. This included nine out of 10 Americans aged 65 or older. But the program’s future is in jeopardy.

In 1983, changes were made to Social Security to shore it up. The result is expected to pay recipients promptly and fully up until 2037. In other words, the government kicked the can down the road, and now an earlier shortfall is expected. The shortfall will leave enough for only 76 percent of scheduled benefits to be distributed.

According to the Social Security Board of Trustees, that shortfall year has now been lowered to 2035. And the amount of the payments is now reduced to 75 percent.

Social Security Trustees’ Recommendations

The Social Security Board of Trustees has proposed a couple of solutions to the crisis. First, they recommend the “immediate reduction of benefits by about 13 percent.” Instead of a deduction in benefits, they propose a payroll tax rate increase, from the current 12.4 percent to 14.4 percent.

If either of these recommendations is enacted, they have stated that the fund would be sustainable to allow full payments to scheduled benefits for the next 75 years.

Demographics Contribute to Social Security Shortfall

Noted as the “gray tsunami,” according to the U.S. Census Bureau, baby boomers make up 69.6 million people between the ages of 58 and 76. In 2022, that’s the second-largest group in the United States. By 2030, all baby boomers will be 65 or over. And one in every five Americans will be of retirement age.

Following behind the baby boomers is Generation X, with 65 million to their cohort; they’re aging, too. This leaves, albeit the largest group, 72.9 million millennials footing the FICA bill for almost 134 million Americans. The result is there are fewer people in the workforce contributing.

Since Social Security is a pay-as-you-go benefit, millennials aren’t exactly socking away funds through their FICA. “Pay as you go” refers to receipts and accumulated surplus used to pay out benefits.

Meanwhile, people are living longer and having fewer children. The average lifespan in America is 79.09. It has been increasing by 0.08 percent yearly since 2019. In 1980, an American’s lifespan was 73.70. But the birth rate has been going down.

Although there was an uptick in births in 2006, to 4 million, the current birthrate is 3.66 million. This means that by 2034, the U.S. Census predicts there will be more Americans over 65 than are born each year. Indeed, immigration will take over population growth, and natural growth will decline.

This dovetails into the shortfall for Social Security.

Retirees a Powerful Constituency

According to an AARP survey, 93 percent of Republicans, 99 percent of Democrats, and 92 percent of independents perceive Social Security as an essential program. But despite this support, 57 percent of Americans don’t feel confident about the future of Social Security.

Seniors constitute a significant voting bloc, and they go to the polls. In 2018, 64 percent of Americans 65 or older voted, while only 37 percent of Americans aged 25–34 voted.

The shortfall projected by the Social Security Board of Trustees hits home to a large population. So it will be interesting to see the reaction of the “gray tsunami” in the voting booth.

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