The future of the Social Security system: Part two

Stephen Lovejoy, Michigan State University Extension - August 27, 2015

Is there a funding issue in the Social Security system?

Figure 1: Social Security Revenue and Benefits, 1970-2090 (Percent of Payroll). Source: Social Security Administration

The fact is that Social Security faces a large structural financing gap and its trust funds are projected to run out of reserves within 20 years.

As the population ages, Social Security faces a large and growing shortfall. Since 2010, the program has been paying out more in benefits than it collects in taxes, thus depleting the reserve assets. The Social Security trustees estimate these deficits will deplete the program’s combined trust fund reserves by 2034; the Congressional Budget Office (CBO) estimates an exhaustion date of 2029. According to the The 2015 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, when the reserves are exhausted, the program will only be able to pay three-quarters to four-fifths of benefits, likely resulting in immediate cuts for all beneficiaries.

The program’s looming insolvency is mainly the result of growing program costs and an aging population. Social Security spending has already risen from 10.4 percent of payroll (4 percent of GDP) in 2000 to 14.1 percent of payroll (4.9 percent of GDP) this year, and the cost of scheduled benefits are projected by the trustees to further grow to 17 percent of payroll (6 percent of GDP) by 2040. Meanwhile, revenue will remain relatively constant at about 13 percent of payroll (4.5 percent of GDP).

Making Social Security solvent for the next 75 years at current benefit levels would require the equivalent of an immediate 2.6 percentage point payroll tax increase or 16 percent across-the-board benefit cut, according to the program’s trustees. CBO estimates that a much larger 4.4 percentage point tax increase or a one-quarter benefit cut would be necessary.