Many people have valid concerns about the financial stability of the Social Security system and its ability to provide benefits to future retirees. However, many of those concerns are based on a misunderstanding of how the Social Security system works. The problem is that misunderstanding a problem can lead you to develop a poor solution to that problem, and create unnecessary stress. Hopefully, this explanation can clarify the issue. 

Concerns are often focused on the condition of the Social Security Trust fund. But, Social Security doesn’t rely entirely on the trust fund. It operates on a pay-as-you-go basis, meaning current workers’ payroll taxes fund the benefits of current retirees. This is by design. As long as there is a working population, current workers payments are meant to transfer directly to current benefit recipients. 

Historically, during years when payroll tax collections exceeded benefit payments, the surplus was placed in the trust fund and invested in special U.S. Treasury securities, effectively loaning the excess funds to the federal government. These securities then generate interest for the trust fund. These dollars then serve as a reserve to cover periods when tax revenues are insufficient to meet benefit obligations, which is what we are experiencing now. 

Demographic shifts such as the retirement of the Baby Boomer generation have caused benefit payments to exceed revenue, so we are spending down the trust fund. According to the Social Security Administration’s 2024 Trustees Report, the combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds are projected to be exhausted by 2035. But it’s important to note that even if the Trust Fund is depleted, Social Security will not be “bankrupt” in the sense that many people believe. The system will still collect payroll taxes, so it will continue to pay benefits, albeit at a reduced level. Upon depletion, incoming payroll taxes are expected to cover approximately 77% of scheduled benefits. I’m not suggesting this is good or bad, or that you should be happy or unhappy. I’m simply saying this is the current reality, free of any hype. 

The takeaway is that Social Security is not going to go away as a function of math, which is how many people interpret the above information – partly because the media and politicians like to spin it that way to get people worked up. I know, we are all shocked. 

Congress would have to deliberately end the program. Congress could do many things to address the anticipated shortfall and ensure full benefit payments. Several options have been proposed: 

1. Increasing Payroll Taxes: Gradually raising the payroll tax rate could generate additional revenue to fund benefits. For instance, increasing the combined employer and employee contribution rate from 12.4% to 14.4% over 20 years could address the 75-year shortfall. 

2. Raising or Eliminating the Taxable Earnings Cap: Currently, only earnings up to a certain limit are subject to Social Security taxes. Raising or removing this cap would subject higher incomes to payroll taxes, increasing revenue. 

3. Adjusting Benefits: Modifying the formula used to calculate benefits, such as reducing payouts for higher earners or altering cost-of-living adjustments, could help balance expenditures. 

4. Raising the Retirement Age: Gradually increasing the full retirement age to reflect longer life expectancies would reduce the total amount paid out in benefits. 

The bottom line is that on the current path your Social Security benefits will not go away completely, but only be reduced, and that assumes Congress does nothing to end or improve the system.