The Social Security Act became law with U.S. President Franklin D. Roosevelt’s signature on August 14, 1935. Social security benefits work as a partial replacement for income for qualified retirees and disabled individuals. Around 68 million people, including retirees and disabled people, receive social security benefits.
There are two Social Security trust funds.
The two Social Security trust funds are the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. OASI pays retirement and survivor benefits while DI handles disability claims. The trust funds were created to hold receipts from payroll taxes. At the end of the first quarter of 2022, the funds had $2.83 trillion in combined reserves.
The funds swung into an annual deficit in 2021. These shortfalls are only expected to get wider in the coming years as Baby Boomers start leaving the workforce in droves and replacements don’t come in fast enough. According to current estimates, on an overall basis, Social Security trust funds are expected to run out of surplus funds in 2035. At that point, they will only cover about 80 percent of the current benefits.
Social Security isn't going bankrupt.
Social Security isn't going bankrupt. However, we could still expect several changes in the way benefits are paid going forward. Social Security could face a serious financial shortfall. Most of the shortfall is due to changing demographics that have led to a gap between income and costs. In 1964, for example, women had on an average 3.2 children compared to 1.8 by 1974. This has reduced the ratio of workers to retirees.
Where does Social Security gets its revenue?
In the U.S., Social Security is financed through a dedicated payroll tax, the Federal Insurance Contributions Act (FICA) tax. Employers and employees each pay 6.2 percent of their wages (up to a taxable maximum of $147,000) while self-employed people pay 12.4 percent. The receipts go into the Social Security trust funds, which are used to pay benefits. Payroll taxes will continue to cover a substantial portion of these benefits going forward as well.
There are some potential solutions to the shortfall in Social Security benefits.
Congress has time to look for solutions to shore up Social Security finances. It could either raise payroll tax rates or cut the benefits. It could also borrow funds to maintain benefits without increasing benefits.
The truth of the matter is that Social Security might not be going bankrupt but it's depleting its reserves quickly. Therefore, everybody should be ready to embrace the change. The current beneficiaries and workers should be ready for the change if and when it happens. In fact, the current working population might have to adjust their retirement plans accordingly.