What year will social security run out?

Social Security is one of America’s most important safety nets and it pays benefits to more than 66 million Americans every month. However, with more baby boomers retiring, and the Social Security Trust Fund reserves getting depleted, there is a risk of the agency going broke. But, how soon can Social Security run out?

Based on the 2022 SSA trustee’s report, the reserves in the trust funds will run out by 2034. The Old Age and Survivors Insurance (OASI) Trust Fund will be able to pay scheduled retirement and survivor benefits until 2034, while the Disability Insurance (DI) Trust fund will be able to pay scheduled benefits until 2057. When the combined reserves of the two trust funds get depleted, continuing tax incomes will be expected to pay 80% of the scheduled benefits.

How is Social Security financed?

The Social Security tax is the main source of revenue for Social Security, and it is levied as a payroll or self-employment tax. In 2022, the Social Security tax rate is 12.4%, and it is shared evenly between the employer and employee. Self-employed individuals pay a Social Security tax of 12.4% on their earnings.

For 2022, the Social Security tax is applied on a maximum wage base of $147,000. The funds collected from taxes are paid to the Social Security Trust Fund, and they are used to fund benefits payments.

Social Security also gets income from the trust funds' interests and federal income taxes on Social Security benefits. However, these incomes only account for a small proportion of the total Social Security funds.

When will Social Security run out?

The Social Security program faces a $13.6 trillion shortfall over the next 75 years, and the situation could get worse as more boomers retire and start claiming benefits. Based on the 2022 Social Security trustee’s report, Social Security runs the risk of becoming insolvent by 2034.

When Social Security runs out, it will reduce the amount of benefits paid to eligible participants. The OASI Trust fund will only be able to pay 77% of the scheduled benefits from the tax income. When OASI and DI trust funds reserves are combined, they will only be enough to pay 80% of the scheduled benefits.

However, Social Security running out of cash does not mean it will not be around. It means that it will exhaust the cash reserves held in its trust fund, but it will still be able to pay benefits using its year-to-year tax income.

Why Social Security is at risk of running out

The Social Security trust funds held $2.9 trillion in cash reserves as of 2021, but these reserves as quickly getting depleted due to various reasons.

Here are some reasons why cash reserves are getting depleted fast:

Increased Life Expectancy

When Social Security started, the life expectancy then was about 60 years, and the retirement age was age 65; only a few people lived long enough to collect benefits. Today, with life expectancy getting closer to 80 years, and the retirement age ranging from 66 to 67, retirees are living longer and collecting monthly checks for a longer time.

More baby boomers retiring

There were approximately 42 workers for every retiree in 1940. Today, that ratio has shrunk to 3-to-1, and it is expected to shrink further to 2-to-1 by 2050. This means that fewer workers are contributing to support an increasing number of retirees, hence putting a strain on the system.

Reduced birth rates

The reduced births in recent years have contributed to the Social Security shortfall. The low birth rate means that fewer workers are paying into the Social Security system, hence there will be reduced funds to support workers who retire or become disabled.

When will happen if Social Security runs out?

If Social Security runs out, it means that it will be unable to pay the scheduled benefits. Here are the possible changes that Social Security could make to stay solvent:

Reduced benefits

When Social Security exhausts its reserves, it will only be left with the year-to-year tax income, which may not be sufficient to pay 100% of the scheduled benefits. Therefore, there will be a reduction in benefits, which could be by as much as 22%. This is a significant financial hit, especially if Social Security is your sole source of retirement benefits.

Extended retirement age

If you were born in 1937, your full retirement age is currently age 66, but this could be extended to between 67 and 69 years. The increased retirement age will force workers to work longer before they can access benefits. Congress could also increase the minimum age for claiming benefits, from the current age of 62, and enforce benefits cuts for workers who claim benefits early.

Increased Social Security tax rate and wage base

Congress may also increase the current Social Security tax to boost Social Security revenues. This burden may be passed to the employees, employers, or both. If the current tax rate is increased from 6.2% to 7%, it could result in additional earnings for Social Security.

Also, Congress may increase the Social Security wage base. Currently, the Social Security tax is applied only on the first $147,000 of your annual income, and the rest of the income is untaxed. Raising the wage base could net more tax revenues from the top earners.

What Congress can do to help Social Security

As the branch of government responsible for enacting and amending laws, the US Congress must act soon to address the funding shortfalls of the Social Security program. The Social Security Trustee’s report noted that further delays to address the crisis could compress the shortfall into fewer years.

Some of the policy options that Congress has at its disposal include increasing the Social Security tax rate, increasing the wage base, extending the retirement age, changing the cost of living adjustment, adding a means-tested component for benefits, or a combination of interventions that increase taxes and reduces benefits.

Still, American workers should not rely solely on Social Security for their retirement income. Investing in other retirement options like 401(k)s, IRAs, and Roth IRAs can help retirees create multiple streams of income.