The Social Security program, much like its name suggests, provides millions of vulnerable Americans with financial security during their retirement or in the event of becoming disabled. Even the slightest of delays or interruption in the payment of benefits could result in severe financial strain to most, if not all, of these households which is why the growing funding issues faced by the program has become a point of major concern for trustees and beneficiaries alike.
Consequently, the latest annual report from the Social Security Board of Trustees is warning that the projected shortfall for the program has moved up a year and if no action is taken soon, a major trust fund will be exhausted as soon as 2033. Some proposals have since been brought forward with the aim of preventing this shortfall, however, Congress has yet to make any concrete decisions. Here is what you need to know.
Social Security projected shortfall
The Social Security program has three sources of funding through which monthly benefits are paid: a dedicated payroll tax that 12.4% of your wages are paid towards, income tax on Social Security benefits, and interest on trust fund reserves. There are two main trust funds, the Old Age and Survivor Insurance (OASI) trust fund which is used to pay retiree and survivor benefits, and the Disability Insurance (DI) trust fund which is used to cover disability benefits.
According to the trustees’ report, the OASI trust fund will be exhausted by 2033, and following this, only 77% of scheduled benefits will be covered. However, if the OASI and DI trust funds are combined into one OASDI trust fund, 100% of scheduled benefits would be covered until 2034. When the combined trust fund is depleted at this point, the remaining revenue would only cover 81% of all scheduled benefits.
Potential solves
A Washington based libertarian think tank, The Cato Institute has determined that, “maintaining benefits at current levels while keeping Social Security trust funds financially stable would require a significant tax increase for American workers.”
With the current payroll rate of 12.4% (which is usually split 50/50 between employer and employee), and assuming a career length of 45 years, an average worker entering the workforce in 2025 will pay around $374,133 in Social Security payroll taxes during their lifetime. Now, if Congress increases the rate of Social Security payroll taxes to allow for at least another 75 years of solvency for the program, the rate will have to be increased to 16.05%, as per the trustees’ report.
With a payroll tax rate of 16.05%, the average worker will have to pay an additional $110,000 in taxes, bringing the total taxes paid over the course of their 45 year career up to $484,261 approximately. Taking it a step further, if Congress hopes to make permanent the solvency, Social Security payroll taxes will have to be increased even further to around 17.6% — bringing the lifetime tax burden up to $531,028.
In their report, The Cato Institute goes on to note that, “The bottom line is that promises to keep Social Security benefits exactly as currently legislated are immensely expensive for younger workers, whether Congress tries to levy additional taxes on all workers or only on those with earnings above the payroll tax cap. Social Security reform is coming. The real question is how this generation will balance the promise to keep seniors out of poverty in old age with keeping the American dream alive for younger generations.”
Additionally, in an op-ed piece for The Washington Post, Republican Senator Bill Cassidy and Democratic Senator Tim Kaine have proposed a plan to establish a new investment trust fund that would require initial funding of $1.5 trillion from the Treasury which will then be used to invest in “stocks, bonds and other investments that generate a higher rate of return” for a 75 year period.
“There is a nationwide appetite to implement a bipartisan, commonsense plan like ours. Waiting until the Social Security Trust Fund is on the eve of crisis would have difficult and preventable consequences. Congress should seize the moment,” Senators Tim Kaine and Bill Cassidy wrote in their op-ed.