With approximately 94% of American workers covered by Social Security and 65 million people currently receiving benefits, keeping Social Security healthy is a major concern.1 Social Security is financed primarily through payroll taxes. Unless Congress act benefits may eventually be reduced. Trustees of the Social Security Trust Funds     release a detailed  report to Congress in June. The good news was that the effects of the pandemic were not as significant as  projected a year ago.

Mixed news for Social Security

Social Security program consists of two programs, the Old-Age and Survivors Insurance (OASI) program and Disability Insurance (OASDI). Each program has its own  financial account (Trust Fund). Payroll taxes collected are deposited in the applicable Trust Fund. OASI provide benefits to retired workers, their families, and survivors of workers. D provides benefits to disabled workers and their families. Funding is also provided by other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation).

Social security is required to invest funds collected in special government-guaranteed Treasury bonds that earn interest. These funds are now being used to pay benefits more than the payroll tax collected. Payroll taxes are not sufficient to pay current benefits. Changes in our demographics are a significant reason for the deficiency.

A recent report by the Trustees estimate that the funds will not be able to fund full retirement and survivor benefits. Benefit would then be reduced to 77% of scheduled OASI benefits, declining to 72% through 2096, the end of the 75-year, long-range projection period.

The Trustees report, estimate the combined reserves (OASDI) will be able to pay scheduled benefits until 2035. Benefit would then be reduced to 80% of scheduled benefits, declining to 74% by 2096. OASI and DI Trust Funds are separate, and generally one program’s taxes and reserves cannot be used to fund the other program. However, this could be changed by Congress, and combining these trust funds in the report is a way to illustrate the financial outlook for Social Security as a whole.

The above is based on current conditions and likely future demographic, economic, and program-specific conditions. Future events including the impact of the pandemic may results in changes not reflected in the Trustee’s estimates.

Some changes can be made to improve the situation

The Trustees continue to urge Congress to address the financial challenges. The sooner Congress acts the less harsh the changes will be. Some of the options that have been suggested including the following:

• Raising the current Social Security payroll tax rate. Increasing the payroll tax to 15.64% from 12.4% would correct the situation
• Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($147,000 in 2022).
• Raising the full retirement age from 67 (for anyone born in 1960 or later).
• Raising the early retirement age from 62.
• Reducing future benefits by about 20.3% for all current and future beneficiaries, or by about 24.1% if reductions were applied only to those who initially become eligible in 2022 or later.
• Changing the benefit formula that is used to calculate benefits.
• Calculating the annual cost-of-living adjustment (COLA) for benefits.

A comprehensive list of potential solutions can be found at https://www.ssa.gov/OACT/solvency/provisions/.

1) Social Security Administration, 2022