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Retirement Planning > Social Security > Social Security Funding

What if Social Security Went Bust and Kept Paying Full Benefits?

By John Manganaro

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The Social Security trust fund used to pay retirement benefits is on track to be depleted as soon as 2032, according to a new analysis published by the Congressional Budget Office.

According to the report, the Old-Age and Survivors Insurance Trust Fund is likely to be exhausted in fiscal 2032, while the Disability Insurance Trust Fund is set for exhaustion much later, in 2052.

The OASI projection is slightly more pessimistic than the latest outlook offered by the Social Security Administration itself, which pins the retirement trust fund depletion date in 2033.

The CBO also includes an intriguing analysis that asks, in effect, what would happen if the Social Security program were to continue to pay benefits as scheduled under current law — regardless of whether the program’s two trust funds had sufficient balances to cover those payments.

In the analysis, the CBO projects that if Social Security paid benefits as scheduled, spending on the program would have to increase over time from 5.2% of gross domestic product in 2023 to 7.0% in 2097.

As the CBO report explains, under current law, revenues dedicated to the Social Security program would remain around 4.6% of GDP over the same period. As such, the funding of full benefits would need to be supported by some meaningful new form of revenue or an infusion of outside money.

In the CBO’s latest projections, the program’s 75-year actuarial deficit is equal to 1.7% of GDP, or 5.1% of taxable payroll, which is slightly higher than what CBO projected last year.

To put it another way, the federal government could pay the benefits prescribed by current law through 2097 (and have a trust fund balance equal to a year’s benefits at the end of that period) if payroll tax rates were raised immediately and permanently by about 5.1 percentage points — from 12.4% of taxable payroll under current law to 17.5% of taxable payroll. This would be a relative rise of 41%.

Other ways to maintain the necessary trust fund balances include reducing scheduled benefits by an amount equivalent to 5.1% of taxable payroll — a relative reduction in benefits of 27%. Additional options would involve combining tax increases with benefit reductions, or transferring other money to the trust funds.

Notably, the CBO report warns that a policy that increases revenues or reduces outlays by the same percentage of taxable payroll each year to eliminate the 75-year shortfall would not necessarily ensure Social Security’s solvency after 2097.

This is because estimates of the actuarial deficit do not account for revenues or outlays after the 75-year projection period ends, and the CBO projects that the gap between revenues and outlays will widen thereafter.

“Although such a policy would create annual surpluses in the next three decades, it would result in growing annual deficits later and would not leave Social Security on a sustainable financial path after 2097,” the report warns.

Credit: Adobe Stock

John Manganaro

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