Understanding Social Security’s Funding

Social Security is primarily funded through the Federal Insurance Contributions Act (FICA) tax, which takes a percentage of workers' wages (6.2% for employees and 6.2% for employers). These funds are deposited into two trust funds:

• Old-Age and Survivors Insurance (OASI) Trust Fund: This funds retirement benefits.
• Disability Insurance (DI) Trust Fund: This funds disability benefits.

These trust funds help pay benefits to retirees, survivors, and individuals with disabilities. The system is designed so that current workers contribute to the fund, and those contributions are used to pay benefits to current retirees and beneficiaries.

The Social Security Trust Fund Shortfall

As of recent projections from the Social Security Trustees:

• The Social Security trust funds (OASI and DI) are expected to be able to fully pay benefits until about 2034.
• After 2034, it is estimated that Social Security will only be able to pay around 77% of benefits unless changes are made.

This shortfall is mainly due to demographic changes. The Baby Boomer generation is retiring, and there are fewer workers contributing to the system relative to the number of retirees. As a result, the system is facing more outgoing payments than incoming revenue, leading to a depletion of the trust funds over time.

Why Is Social Security Facing a Shortfall?

Several factors contribute to the funding gap:

• Aging Population: The U.S. population is aging, and more people are living longer, which increases the number of beneficiaries. Meanwhile, fewer workers are entering the workforce, which reduces the number of people paying into the system.
• Declining Birth Rates: Fewer children are being born, which means fewer people will be entering the workforce in the future to support the growing number of retirees.
• Economic Factors: Economic downturns or slow economic growth can affect the income generated through FICA taxes. High unemployment rates or lower wages can reduce the funds going into the Social Security system.

What Happens After 2034?

While Social Security may not be able to pay full benefits after 2034, it will still have some income coming in from payroll taxes. The 77% payment projection means that beneficiaries would still receive a significant portion of their benefits, but it could be less than expected.

Can Social Security Be Saved?

Although there is a projected shortfall, Social Security won’t run out of money entirely. The government can take action to address the funding gap. Some of the most commonly discussed options include:

• Raising the Payroll Tax Rate: Increasing the FICA tax rate (currently 6.2% for employees and employers) could help boost revenue into the system.
• Raising the Social Security Tax Cap: The tax cap is the maximum amount of income subject to Social Security tax ($160,200 in 2023). Raising or eliminating the cap would bring in more revenue from higher earners.
• Gradually Increasing the Full Retirement Age: Raising the full retirement age (currently 67 for those born in 1960 or later) could help reduce the number of people collecting benefits at any given time.
• Cutting Benefits: Some proposals suggest reducing benefits for higher-income individuals or reducing the cost-of-living adjustments (COLAs) for Social Security recipients.