At the start of last week the latest report from the Social Security Trustees (link) was released, leading to predictable but misleading warnings that the system was going to “run dry.” For example, the headline on this article from the website of Boston’s WBUR public radio declares: “Unless Congress Acts, Social Security Will Run Out Of Money By 2035, Government Report Says.”
The first sentence under the headline seemingly confirms it: “According to an annual report from the government this week, Social Security will run out of money by 2035.” But then the second sentence reads, “It’s a worrisome reminder for soon-to-be retirees, who, unless Congress acts, will receive just three-quarters of their scheduled benefits.”
Most people are likely to find this confusing, and they’re right. Here’s the straight story:
Social Security is a pay-as-you-go system. That is, the benefits paid out this year are paid for mainly by Social Security taxes coming in this year. This is how the system is supposed to work, how it has always worked, and how it was originally advertised as working. Many people mistakenly think it’s a sort of enforced saving program, but if it had been set up that way it would have been decades before anybody received any significant benefits.
Of course, it’s highly unlikely that the taxes collected would happen to exactly match the benefits being paid out, so the Social Security retirement system has a trust fund that operates like a reservoir in a water system. taxes flow into the trust fund and are paid out from the trust fund, and if the taxes coming in exceed the benefits being paid out, the trust fund grows to build of a reserve to cover a future shortfall.
When people talk about Social Security “running out of money,” what they actually mean is that the reserve is projected to be depleted in about 2035 (give or take), at which point benefits would have to be cut to just the amount Social Security taxes would be able to cover with the taxes coming in, which the same report estimates would be about 77 percent of scheduled benefits.
This might sound a little worse than it is, in that future average benefits are supposed to be higher than benefits being paid out today, even after adjusting for inflation. That’s because Social Security benefits are based on wages, and over time wages tend to grow at least a little faster than inflation. For the same reason, today’s average benefits are likewise larger than they were in the past. So 77% of future average benefits will be more than 77% of current average benefits and more than 100% of average benefits being paid out at some point in the past. (No, I haven’t looked up exactly when that was.)
Now, this doesn’t mean that the reduction is nothing to be concerned about. Quite the contrary. If this scenario is allowed to play out, then people drawing Social Security would take a sudden big hit to their spending power, and that would hurt not just them but the businesses that depend on them and ultimately the whole economy. So definitely Congress ought to do something. I’m just pointing that even if they don’t (which, alas, lately seems a safe bet), it’s not like Social Security would literally run dry.
(Incidentally, there are actually two trust funds, one for retirement benefits and the other for disability benefits. The latter fund is in better shape, mainly because of a decline in disability claims.)
There are various ways of fixing the system so benefits don’t suddenly drive off a cliff. Benefit growth could be reduced or tax collections increased (for example by doing away with the current cap on what high-income people pay in Social Security taxes) or some combination of the two.
You might not have heard about it yet, but there is a concrete proposal on the table right now to address the problems far into the future and in a number of ways improve the system. It’s proposed by Representative John Larson (D-Connecticut) and colleagues in the House of Representatives. There’s a clear summary here with a link to the actual text of the bill if you want all the details.
Confusion about Social Security is nothing new, of course. Here, for example, is a more or less similar post I wrote back in 2012. A lot of myths turn out to arise from misconceptions about the meaning of life expectancy, leading for example to confused pronouncements on the topic from former Texas governor, former presidential candidate, and U.S. Energy Secretary Rick Perry (see this post) and from former Senator Alan Simpson (see this one). Senator Simpson in particular ought to have known better, since he had just co-chaired the National Debt Commission with Erskine Bowles.
Possibly the best succinct explanation of life expectancy was a four-minute video from Hank Green I previously highlighted in a 2017 post here.