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Retirement Planning > Social Security > Social Security Funding

Should You Count on Social Security?

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What You Need to Know

  • A tax increase could have solved the funding gap decades ago, but Congress never likes to raise taxes.
  • Social Security trust fund bonds are, in effect, IOUs the government has written to itself. This is not confidence-inspiring.
  • Creative policymaking could lead to a more targeted, more effective Social Security plan.

It’s no secret that Americans worry about the future of Social Security. Only 35% of Americans said that they were “very” or “somewhat” confident that Social Security would pay them at least as much as today’s retirees receive when surveyed by the Employee Benefit Research Institute in 2016. 

Thirty percent of Americans said they were “not very confident” in Social Security, and 33% said they were “not at all confident” in the program that provides the largest source of income for most Americans in old age.

By contrast, 81% of Americans said they were “somewhat” or “very” confident in their retirement accounts as a way to attain retirement security in a 2015 survey conducted by the Investment Company Institute.

The Social Security story is familiar: An aging population driven by lower birthrates and increased life spans means fewer workers and more retirees, a recipe for insolvency in a “pay-as-you-go” program that transfers taxes from workers into benefits to retirees. 

One could look at a news article from the early 1990s, and it would read very similarly to today’s media coverage: As the baby boomers retire at the rate of 10,000 per day, Social Security will draw down the assets in its trust fund and, come the early 2030s, be unable to pay the full benefits it has promised.

Without increased revenue flowing to Social Security, benefits could be cut by 22% when the trust fund is exhausted. Americans are understandably skeptical they will receive the full benefits they are owed. 

The Current Status

But is all this gloom and doom regarding Social Security’s future justified? It’s worth catching up on where Social Security benefits stand today.

Progressive activists claim that Social Security benefits have not been increased in nearly half a century, while forgetting 1977 congressional legislation enacting automatic benefit increases, not merely for the cost of living after retirement, but for increases in real wages before retirement. 

Social Security Administration data shows that, in the past two decades alone, the average benefit collected by a new retiree has increased by 32% above inflation. While Social Security is an imperfect safety program, Census Bureau research has found that the share of retirees with sub-poverty-level incomes dropped from 9.3% in 1990 to only 6.3% in 2015. 

So, whatever financial troubles Social Security faces and however Congress chooses to address them, older Americans are starting from a stronger base than in the past.

Moreover, while a strict reading of the law states that Social Security must cut benefits when the trust fund is exhausted, that doomsday scenario assumes that Congress would stand idly by. Recent history shows how unlikely that is to happen. 

In 2016, the trust fund for Social Security’s Disability Insurance (or DI) program was projected to run dry. In the years leading up to 2016, we read of the problems facing the DI plan, in particular the steadily rising numbers of disability beneficiaries even as the share of Americans reporting a work-limiting disability remained steady.

The DI fund’s projected insolvency was seen as a tipping point for Congress to finally enact reforms, given research concluding that many DI beneficiaries could continue to work. 

What actually happened? Congress, including both Republicans and Democrats, voted to shift some of the 12.4% Social Security payroll tax from the retirement program to the disability program, a move that delayed the DI fund’s insolvency as well as pushing substantive reforms to the back burner. 

What’s Next?

If Congress were to not allow a single penny of cuts to disability benefits, not to mention failing to enact a single meaningful reform, what are the chances that the far more numerous and politically powerful retirees will be subjected to a 22% across-the-board cut?

I will reach retirement age just as the trust fund is projected to run out, and benefit cuts aren’t high on my list of worries. 

Astute readers may note that while politicians certainly don’t like cutting Social Security benefits, they also don’t like raising taxes. If they did, Social Security’s funding gap would have been solved via a tax increase decades ago.

And yet Social Security’s looming insolvency means Congress seemingly must do one or the other. The resolution to this conundrum lies, strangely enough, with the Social Security Trust Funds — or, more accurately, the lack of their stability.

Trust Fund Update

As fiscal watchdogs pointed out as early as the 1980s, the Social Security Trust Funds don’t actually make it easier for the government to pay benefits. The trust funds consist of special-issue non-tradable U.S. Treasury securities that are held in three-ring binders in a locked file cabinet in West Virginia. By itself, that is not confidence-inspiring. 

These trust fund bonds are, in effect, IOUs the government has written to itself. When Social Security was running payroll tax surpluses, from the mid-1980s through 2009, the federal government took those surpluses and spent them on other things, giving Social Security bonds in exchange. 

Today, when Social Security trades in those trust fund bonds to help pay full benefits, the federal government must come up with the money to pay them, which entails either higher taxes, lower spending on other programs, or higher federal debt.

These are precisely the same choices the federal budget would face if there were no trust fund in the first place. While the trust fund has legal and political significance, financially it doesn’t make it easier to pay benefits.

There is an upside, however: If having a trust fund doesn’t make it easier to pay Social Security benefits, not having a trust fund doesn’t make it harder.

Think of it this way: In 2033, the year prior to the trust fund becoming insolvent, the federal government will transfer $338 billion (in today’s dollars) to Social Security to pay off bonds held in the trust fund. In 2034, the trust fund will run dry and no longer has a legal claim on those transfers of cash. 

But that doesn’t mean Congress can’t keep on paying. If Congress allowed Social Security benefits to be cut by 22% in 2034, it would also have an additional $338 billion in general revenue sitting around that previously were transferred to Social Security, but would no longer be needed.

Congress could increase spending in other areas, or it could give everyone a big tax cut, or it could reduce the budget deficit. Or, it could keep transferring that money to Social Security.

Congress & the Key Issue

The point is that what matters for the big picture isn’t the balance of the trust fund, but the amount of benefits the government is willing and able to pay out at the time the trust fund runs dry. If the federal government can afford to pay the nearly $1.7 trillion in benefits owed in 2034, it can almost certainly come up with a similar amount of money to pay benefits in 2035.

Now, it’s unlikely Congress will be quite so transparent about things. From its very founding in the Franklin Roosevelt administration, both Democrats and Republicans have opposed using general tax revenue — in other words, income taxes — to fund Social Security, believing that general revenue funding undercuts Social Security as an “earned benefit” and makes it look like a “welfare program.” 

But even that can be worked around. For instance, Congress might increase the maximum salary that is subject to Social Security payroll taxes, which is $142,800 in 2021, but then offset this tax increase by reducing income tax rates for people in that salary range.

It’s revenue neutral for the government and tax neutral for taxpayers, but avoids the optics of simply shoveling income tax money into Social Security. 

Congress might take some other steps as well, to make what is effectively a bailout of Social Security look more like a true reform. For instance, both Democrats and Republicans favor increasing benefits for Americans who work long careers at low wages.

Both parties have also worked together to increase opportunities for retirement saving outside of Social Security, most recently in the Secure Act.

Other Possible Reforms

It’s easy to imagine further enhancements of private retirement savings being tacked on to a Social Security bill. Or perhaps some long-term, phased-in limitation on benefits for high earners might enter the picture.

Alternatively, a reform plan might increase the taxes that retirees pay on their Social Security benefits, a step that would recoup some of the costs of bailing out the program. 

However, the most prominent reform proposal from congressional Democrats, the Social Security 2100 Act, actually reduces benefit taxation. There just isn’t a strong political constituency for reducing payments to older adults, despite their growing affluence relative to working-age households.

None of this is to say that I think this is the best policy, or even particularly good policy. A Social Security program designed for the world of the 1930s would be more expensive and less efficient than one designed for the 2030s and beyond. 

Looking Back, Forward

When Social Security was created there were barely even mutual funds, much less auto-enrollment 401(k) plans holding low-cost target date funds. It’s a different world today, and those differences could make for a more targeted but also more effective Social Security plan, if policymakers would be more creative.

For instance, Australia has one of the top-rated retirement systems in the world, while spending less than half as much on retirement benefits as the U.S. The reason: Australia enrolls every worker in a retirement account funded by employers with 10% of employee wages. 

The government funds a means-tested benefit to keep retirees out of poverty, but retirement accounts provide most income on top of that base amount. And as the Australian saving system matures, the government’s costs are projected to go down, while in the U.S., Social Security costs will continue to increase. 

Social Security’s rising costs are a significant problem, just not a significant problem for most retirees, who are unlikely to experience meaningful benefit cuts. The problem posed by rising Social Security outlays is fewer resources available for everything else the federal government does, or higher taxes that leave less money available to households to support themselves.

There isn’t any reason other than political inertia that the federal government must provide tens of thousands of dollars in annual benefits to middle- and high-income retirees who could have easily saved more on their own. But for the time being, that’s the most likely outcome. 

Andrew G. Biggs is a senior fellow at the American Enterprise Institute.


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