Will Social Security Run Out of Money?

The Social Security system of retirement benefits, begun in 1935, are a crucial underpinning of life for American retirees. For most people over 65, it’s undoubtedly hard to imagine life without this retirement benefit.

About half of Americans 65 or older live in households that depend on Social Security benefits for half or more of their income, says the Social Security Administration. In a quarter of such homes, Social Security checks comprise nearly their entire income.

Since its inception, Social Security has hit periodic financial crises, and Congress has always resolved them with adjustments. Today, Social Security approaches another financial cliff for these and other reasons:

• The retirement of the huge baby boomer generation
• Longer lifespans
• Lower birth rates
• Growing income inequality

Here’s a quick look at the problem and whether Social Security will be allowed to go broke this time.

How Social Security is financed

Your Social Security retirement check is funded from payroll taxes on Americans’ earnings over their working life and taxes on some Social Security retirement income.

Employers and employees each contribute 6.2% of wages to the fund in 2022 (to an income maximum of $147,000). Self-employed people pay the entire 12.4%. Also, 40% of Social Security recipients pay income tax on their benefits, money which goes back into Social Security’s trust fund.

Here’s a breakdown of the sources of Social Security’s revenue in 2021:

• Payroll tax: $980.06 billion (90.1%)
• Interest income: $70.1 billion in interest on invested funds (6.4%)
• Revenue from tax on benefits: $37.6 billion (3.4%)

Benefits being paid out now exceed money coming in, and Social Security’s $2.9 trillion trust fund has begun shrinking to cover benefit checks.

Social Security won’t run out anytime soon

If nothing is done, Social Security’s trust fund will be fully drained in 2034, according to current estimates.

However, that doesn’t mean the death of Social Security. Benefits wouldn’t stop — the system would continue to operate and payroll taxes would continue to fund benefits.

Payments might be reduced eventually

After 2034, Social Security’s annual income would still be sufficient to pay about three-quarters of benefits for the next retiring generations. Even in 2096, Social Security’s income would be able to pay 74% of its costs.

Nothing may be lost if Congress acts

Changes will almost certainly be required for Social Security to continue in its present form, Money Talks News founder Stacy Johnson says,

But the problem is not at all unsolvable. Lawmakers have many options for responding to changing times. A few suggested by AARP include:

• Raising the payroll tax rate
• Lifting the cap on taxable earnings above the current $147,000 to tap more of wealthy taxpayers’ income
• Folding state and local government employees into the system to broaden the tax base
• Gradually lifting the age at which recipients can claim benefits

History provides numerous examples of congressional action to maintain the program, including in 1950, 1954, 1956, 1961, 1972 and 1977.

One of the most substantial fixes was initiated by President Ronald Reagan in the early 1980s. When the program faced a funding crisis, he initiated a study known as the Greenspan Commission, pushing Congress to act.

In 1983, the resulting law beefed up Social Security for a long time to come by, among other things, taxing benefits and raising the retirement age.