2024 Trustees Report shows there is time to fix the long-term funding gap
Reviewed by Charlene RhinehartFact checked by Vikki Velasquez
The long-term funding shortfall threatening Social Security has garnered so much public notice that a majority of poll respondents profess to be worried about the system a “great deal” or a “fair amount.”
And perhaps they should be. A 2024 annual report from Social Security and Medicare’s Boards of Trustees has projected that growing annual deficits caused by the rising proportion of benefit recipients relative to contributing workers will deplete the reserves of the main Social Security trust fund within about 10 years. This will require benefit cuts if workers’ payroll tax receipts are not increased.
However, the scale of the long-term funding gap is such that fixing it over time is reasonably affordable, although the cost increases the longer Congress waits to act. Congress has acted in the past to shore up funding for the Social Security system whenever it faced insolvency. It will face pressure to do so again from beneficiaries who have never before accounted for such a large share of the U.S. population.
Key Takeaways
- The 2024 Old Age, Survivors, and Disability Insurance (OASDI) Trustees report projects that Social Security’s main trust fund will run out of reserves in 2033.
- The projected deficits are due to an aging population as Baby Boomer retirements accelerate the decline in the number of workers supporting retirees.
- Ongoing payroll tax receipts are expected to cover 79% of scheduled benefits when the retirement trust fund is depleted.
- Funding shortfall solutions include payroll tax hikes and benefit cuts, such as raising the retirement age.
- The cost of the measures required to address the shortfall rises as changes are delayed.
What Is Social Security?
The Social Security program is managed by the Social Security Administration (SSA). It’s also known as the Old Age, Survivors, and Disability Insurance (OASDI) Program. It consists of two funds:
- The Old Age and Survivors Insurance (OASI) Trust Fund for retirees
- The Disability Insurance (DI) Trust Fund for individuals with disabilities
These two funds are legally separate and their financial prospects differ significantly.
Social Security was launched during the Great Depression as a safety net for older adults. The program was designed to function as insurance, which is why Social Security payments are called benefits.
How Does Social Security Pay Benefits?
Social Security benefits are funded by ongoing payroll tax receipts and accumulated reserves in a pay-as-you-go system. Everyone’s contributions are pooled and a recipient can receive benefits greater than their contribution and associated fund returns.
The system accumulated a considerable surplus over the years that is projected to rapidly deplete as annual benefit payouts start exceeding tax receipts and the trust funds’ interest income.
Social Security outlays are expected to continue to increase at a much faster pace than its receipts as the huge Baby Boomer generation continues to retire, at least until Congress fixes the funding or until the reserves are spent and benefits are cut.
When the youngest Boomers reach age 67 by 2031, qualifying them for full Social Security benefits, there will be 75 million Americans age 65 and older, up from 39 million in 2008. The growing number of retirees is leaving fewer workers to support each benefit recipient with payroll contributions. The beneficiary-to-worker ratio is expected to rise from 35 per 100 in 2014 to 44 per 100 in 2030.
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The Greenspan Commission
This wave of Baby Boomer retirements was not unexpected. It was planned for in 1983 when Ronald Reagan named Alan Greenspan to lead the bipartisan National Commission on Social Security Reform. The Greenspan Commission, as it came to be known, produced a funding fix to address the trust funds’ imminent depletion and leave them in a better position in the long run.
One of the biggest Social Security changes made by Congress on the Greenspan Commission’s recommendation was the change in the age at which Americans qualify for full Social Security benefits. It was increased from 65 to 67 for those born in 1960 or later.
Another key was increasing Social Security tax rates to build up the associated trust funds. The tax rate was 5.4% each for employees and employers in 1983. It rose to 5.7% in 1984, then to 6.06% in 1988 and to 6.2% in 1990, where it remains in 2024.
2033
The year when Social Security’s trust fund for retirement benefits is expected to be depleted.
2024 Social Security Finances
As a result of the 1983 changes, the Social Security trust funds have accumulated significant reserves after running annual surpluses every year from 1982 to 2020. The program’s annual deficit in 2021 was projected to narrow slightly in 2022 and then widen significantly in each of the next nine years.
The 2024 annual report of the trust funds’ trustees provides more numbers:
- Social Security’s two trust funds held a combined $2.64 trillion at the end of 2023.
- Expenditures in 2023 were $1.24 trillion and total income was $1.17 trillion.
- The OASI trust fund is expected to run out of reserves in 2033. Once that happens, program income will be able to cover 79% of Social Security benefits.
- The DI trust fund is projected to have sufficient reserves “through at least 2098, the last year of this report’s projection period.”
- If combined, the two trust funds would be exhausted in 2035, one year later than was estimated last year.
Possible Fixes
A fix is clearly needed to avoid a reduction in Social Security benefits when the trust funds run out of money. Many solutions have been proposed to ensure that Social Security that remains solvent. Congress may opt for some combination of measures when it tackles the issue.
Raise the Payroll Tax Rates
Payroll taxes would have to rise by 3.5 percentage points to eliminate Social Security’s projected actuarial deficit over 75 years. This would ensure that the program has the funding to pay scheduled benefits in full over that time frame. The payroll tax rate is 12.4% with workers contributing 6.2% and employers matching that contribution. Self-employed workers pay 12.4%.
Eliminate the Cap on Taxable Income
There’s a cap on annual income subject to Social Security payroll taxes and this is also used in calculating Social Security benefits. The cap is $168,600 in 2024.
According to a December 2021 Congressional Research Service report, eliminating the payroll tax cap while leaving in place the rules that cap high earners’ benefits would address 73% of the projected shortfall. Payroll tax rates could then be raised from 12.4% to about 13.36% to eliminate the shortfall in its entirety.
Raise the Retirement Age
Those born in 1960 qualify for the reduced Social Security benefits available at age 62 in 2022. People born in 1955 and 1956 will qualify for full benefits at age 67 no later than 2023. Some have suggested raising the full retirement age to 69 or 70, effectively creating an across-the-board benefits cut.
The SSA estimates based on the assumptions in the report that gradually raising the full retirement age to 69 for those born in 1972 or later and increasing it by one month every two years thereafter would eliminate 37% of the system’s long-term funding shortfall. The SSA’s Office of the Chief Actuary regularly posts estimates of the financial effect of a variety of Social Security reform proposals and provisions.
Invest a Portion of Trust Funds’ Reserves in Stocks
Social Security trust funds invest receipts that aren’t immediately needed to pay benefits in special-issue U.S. debt obligations. By law they may also hold marketable U.S. debt securities and they’ve done so in the past. Special-issue debt sold to the Social Security trust funds may be redeemed at face value at any time, in contrast to the Treasury’s marketable securities which are only guaranteed to return face value upon redemption.
Note
In practice, redemptions before maturity happen only if required to cover current costs, not to reinvest proceeds at a higher yield as rates rise.
Stock market returns have historically outpaced those from fixed-income investments on average, so some have suggested that the Social Security trust funds invest a portion of their reserves in stocks, most likely through broad market exchange-traded funds, to increase their investment income.
Any change would only be meaningful if a fix to the system’s projected funding shortfall is forthcoming. The reserves will otherwise be depleted too soon for returns on them to matter.
The policy change would also increase the trust funds’ risk because equity returns are more variable. A 2019 Congressional Research Service report concluded that risk would be manageable for a gradually increased equity allocation up to a maximum of 40% of the reserves. Risks that an investment in equities on that scale would interfere with the operation of private companies or securities markets could also be addressed, according to the report.
One study used Monte Carlo simulations to estimate the long-term performance of trust fund reserves with a 40% allocation to equities. It found that the median outcome was a reserve ratio of 330% of the next year’s costs at the end of the 75-year projection period.
In contrast, the median outcome for a portfolio made up entirely of U.S. government debt special issues was reserves depletion in year 74 of the simulation. The simulations assumed future annual equity returns averaging 6.6% versus a historical average of 9.5% as of 2017.
What Is Social Security?
Social Security is the term used to describe the Old Age, Survivors, and Disability Insurance (OASDI) program. It’s run by the U.S. Social Security Administration and it provides benefits to retirees, survivors, and disabled individuals who can no longer work.
The program is funded by workers through payroll deductions. This money goes into two trust funds: one for retirees (the Old Age and Survivors Insurance Trust Fund) and the other for disabled beneficiaries (the Disability Insurance Trust Fund).
When Can I Start Taking Social Security Benefits?
You can start receiving Social Security benefits as early as age 62. But keep in mind that your monthly benefit amount decreases the earlier you take Social Security benefits. You’ll collect more each month the longer you push off retirement.
What Percentage of Payroll Taxes Go to Social Security?
The total percentage of payroll taxes that fund Social Security is 12.4% per individual. This amount is split equally between employers and employees. Each pays 6.2%. Self-employed individuals must pay the total amount on their own.
The Bottom Line
Reduced benefits could still be paid from ongoing payroll tax revenue without meaningful Social Security funding changes, but the sooner Congress fixes the system’s deficits to avert that possibility, the better off the system and its recipients will be.
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