The Social Security Administration will run an annual deficit averaging 12% over the next decade and the funding gap will grow as more baby boomers retire, according to an analysis by the Congressional Budget Office.
For fiscal 2013, Social Security spending totaled $808 billion, representing about a quarter of all federal spending. Revenue added to the Social Security system in 2013 was $745 billion. The system makes payments to 58 million people, about 70% of them retirees or their spouses and children.
The Social Security deficit will rise to more than 30% by 2030, according to the CBO forecast, as more baby boomers retire, increasing benefits payments as a share of the economy.
At the same time, tax collections as a share of the economy will remain constant. About 96% of Social Security’s money comes from payroll taxes. The rest comes from taxes paid by those receiving benefits once they reach a certain income level.
The two trust funds for benefit payments – one for disability and the other for old age and survivors insurance – are in danger of being exhausted in the next 20 years. If that happens, benefit payments will be reduced because the only money available to make them will be from incoming tax collections. In that case, retirement benefits would be cut by 25%.
Various ideas to prolong the lifeof the Social Security trust funds have been proposed. One idea is to remove the wage cap from Social Security taxes. Currently, the tax is not paid on earnings above $113,700. That plan would increase revenue and, by some measure, eliminate the deficit. Other proposals have called for cuts in benefits or raising the retirement age. Those plans would decrease outlays.
Check out 6 Things About Social Security Advisors Should Tell Clients on ThinkAdvisor.