Social Security fund running out of money

The Social Security Trust Fund is going broke. The Congressional Budget Office estimates that the Fund will be fully depleted in 2033. Under current law, Social Security benefits can only be paid from a combination of current Social Security tax revenue and surplus past revenue. When the surplus is gone, benefits paid in 2034 will be about 23% lower than benefits paid in 2033.

In conception, Social Security works like this.

Workers and their employers pay money into Social Security with every paycheck. When the worker retires, his or her benefits are paid from the money contributed plus the earnings on the money contributed. Because there is a limit to the benefits paid, there is a corresponding limit to the taxes collected.

Since the taxes are collected long before the benefits are paid, the surplus goes into the Social Security Trust Fund.

In practice, as President Biden is fond of saying, “Here's the deal.”

Politicians being politicians, Social Security benefits have been raised over the years without a commensurate increase in taxes. In addition, life expectancy has increased more than the Social Security retirement age.

The options for putting the current system on an actuarially sound footing are well known. Raise taxes, cut benefits or both.

A reasonable first step would be to reduce benefits in excess of contributions plus earnings for those who do not need the money. There is no reason for the well-off to turn a profit on Social Security.

Benefits could also be reduced by shrinking or suspending cost of living increases. The retirement age could be increased, especially among those without physically demanding occupations.

On the other side of the ledger, taxes could be increased. The payroll tax current sits at 12.4% of employment income up to $160,200 in 2023. The tax rate could be increased. The income limit could be altered. The tax could be applied to non-employment income from rents, interest, dividends and capital gains.

The solution nobody seems to talk about is changing the law so Social Security can be partially funded from general tax revenue. This is exactly what is happening today although nobody likes to admit it.

Again, here's the deal. There is no cash in the Social Security Trust Fund. Surpluses were looted and spent on other programs long ago. The fund holds nothing but a pile of IOUs which are exchanged for general tax revenue as needed. Even if taxes were raised or benefits cut to restore a post-2033 surplus, there is no reason to believe such a surplus would not be looted again.

The genius of Social Security was creating a belief that workers paid money into a system and received their own money back in the form of retirement benefits. Contributions and benefits were relatively balanced so the program attained near universal approval. The further the system strays from that balance — favoring one generation over another, creating large discrepancies between taxes paid and benefits received or, worst of all, making promises about the future that no one believes — the less popular it will become.