We first wrote in this column about the impending crisis in the Social Security trust fund in 2012. Back then, the trustees of the program estimated that the money would run out in 2033. Fortunately, that gave Congress a full 21 years to address the deficit and put the program back on solid footing.
Fast-forward to the latest report on the health of Social Security and Medicare, released two weeks ago. The trustees now project that the programs will go broke in — wait for it — 2033, now just nine years away. Because so much time has elapsed with no action, the fixes will be much more painful than they would have been had the problem been addressed 13 years ago. And despite the urgency, there appears to be zero interest in tackling the problem in the current Congress, so the pain will multiply.
A common misconception about Social Security is the notion that retired workers are receiving a return of their historical contributions. In fact, current Social Security income payments are financed primarily by current workers’ payroll taxes, a structure known as “pay as you go.” The establishment of the trust funds for Social Security and Medicare have contributed to the impression that beneficiaries receive back what they contributed. In fact, the trusts are simply a reservoir into which tax revenues stream and from which payments flow. If outflows exceed inflows, as is currently the case, the reservoir eventually runs dry.
Social Security and Medicare are treated differently than discretionary federal spending like defense, education, transportation and veterans’ benefits. The main Social Security account, called the Old Age and Survivors Insurance trust, was created in 1939 to receive income and disburse benefits without the need for annual appropriations by Congress. Payroll taxes, taxes on Social Security benefits and interest earned on the fund deposits are the principal income sources.
Benefits are paid out of the trust fund according to a specific formula involving work and wage history and retirement age. So long as there is enough money in the trust, everyone gets paid. However, in 2010, payouts exceeded tax revenues and since 2021 payments have exceeded total revenue including interest, draining the fund balance.