Social Security: What Would Happen If the
Trust Funds Ran Out?
Christine Scott
Specialist in Social Policy
June 15, 2012


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Social Security: What Would Happen If the Trust Funds Ran Out?

Summary
The Social Security trust funds are projected to become exhausted in 2033, according to the 2012
Social Security Trustees Report. If Congress does not act before then, the trust funds would be
unable to pay full Social Security benefits on time. If full Social Security benefits could not be
paid on time, the lives of millions of people who rely on Social Security could be disrupted.
The Social Security Act does not specify what would happen to benefits if the trust funds became
insolvent. However, it is clear that full Social Security benefits could not be paid on time because
the Antideficiency Act prohibits government spending in excess of available funds. After
insolvency, Social Security would continue to receive tax income, from which approximately
75% of benefits could be paid. Either full benefit checks would be paid on a delayed schedule or
reduced benefits would be paid on time. In either case, Social Security beneficiaries and
qualifying applicants would remain legally entitled to full benefits and could take legal action to
claim the balance of their benefits.
Social Security solvency could be restored by cutting Social Security’s spending, increasing its
income, or some combination of the two. Over the long range (i.e., over the next 75 years), the
Social Security trustees estimate that the trust funds have a shortfall of $8.6 trillion in present
value terms, or 2.67% of taxable payroll. The sooner Congress acts to fill this gap, the smaller the
changes to Social Security need to be, because earlier changes could be spread to a larger number
of workers and beneficiaries over a longer period of time. If Congress waits until the moment of
insolvency to act, the trust funds’ annual deficits could be eliminated with benefit cuts of about
25% in 2033 that will gradually rise to about 27% by 2086. Congress could also eliminate annual
deficits by raising the Social Security payroll tax rate from 12.40% to 16.7% in 2033, then
gradually increasing it to 17.1% by 2086. To maintain annual balance after 2086, larger benefit
reductions or tax increases would be required.
Prompt action to restore Social Security solvency would be advantageous. The combined trust
funds began to run annual cash-flow deficits in 2010. Cash-flow deficits require the redemption
of government bonds accumulated in earlier years. Cash-flow deficits do not affect Social
Security directly, but the redemption of the trust fund bonds puts pressure on the overall federal
budget, which is in deficit. Earlier changes would allow workers and beneficiaries time to adjust
their retirement plans. Finally, if Congress were to act today, the benefit cuts or tax increases
necessary to restore solvency until 2086 would be smaller than those needed if Congress waited
until the trust funds became insolvent to act. This report will be updated as events warrant.

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Social Security: What Would Happen If the Trust Funds Ran Out?

Contents
Introduction...................................................................................................................................... 1
Background...................................................................................................................................... 1
The Social Security Trust Funds................................................................................................ 1
How the Trust Funds Work.................................................................................................. 1
Historical Trust Fund Operations ........................................................................................ 3
The Trustees’ Projections .................................................................................................... 4
Legal Background on Trust Fund Insolvency............................................................................ 5
The Antideficiency Act........................................................................................................ 5
Legal Entitlement to Social Security Benefits .................................................................... 5
What Happens to Benefits in the Case of Insolvency?........................................................ 5
What If Congress Waits to Act?....................................................................................................... 6
Benefit Cut Scenario.................................................................................................................. 7
Size of Benefit Cuts............................................................................................................. 7
Impact of Benefit Cuts ........................................................................................................ 8
Tax Increase Scenario.............................................................................................................. 11
Size of Payroll Tax Rate Increases .................................................................................... 11
Impact of Payroll Tax Increases ........................................................................................ 12
Conclusion ..................................................................................................................................... 13

Figures
Figure 1. Scheduled Benefits Payable at Current Law Payroll Tax Rates, 2012-2086.................... 8
Figure 2. Replacement Rates Under Benefit Cut Scenario, 2012-2086......................................... 10
Figure 3. Initial Annual Benefits Payable Under Benefit Cut Scenario, 2012-2086 ..................... 11
Figure 4. Combined Payroll Tax Rate Needed To Fund Scheduled Benefits, 2012-2086 ............. 12

Tables
Table 1. Current Social Security Benefit Payment Schedule........................................................... 6

Acknowledgments ......................................................................................................................... 13

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Social Security: What Would Happen If the Trust Funds Ran Out?

Introduction
Each year when the Social Security trustees release their annual report, attention is focused on the
trustees’ latest projections of when the Social Security trust funds will become insolvent.1 Less
attention is paid to what trust fund insolvency would mean. What would happen to benefits?
What options would Congress have to restore solvency? How would policy changes at this point
affect beneficiaries?
There are many misconceptions about what would happen if the Social Security trust funds ran
out. For example, some Americans may believe that if the trust funds were exhausted, Social
Security will be completely broke and unable to pay any benefits. This is not the case. In fact, in
2033, the first year of projected insolvency, the program is projected to have enough income
(from taxes) to pay about 75% of scheduled benefits. However, the percentage of scheduled
benefits that could be paid with income (from taxes) would decline to 73% in 2086, at the end of
the trustees’ long-term projection period.
Another myth is that the Social Security Act includes a specific “fail-safe” provision in case of
trust fund exhaustion—for example, a formula for cutting benefits or raising taxes to eliminate
annual deficits. This is also untrue. In fact, the act does not specify what would happen to benefits
if the trust funds are exhausted. The most likely scenario seems to be that benefit checks would be
delayed.
This report explains what the Social Security trust funds are and how they work. It describes the
historical operations of the trust funds and the Social Security trustees’ projections of future
operations. It explains what could happen if Congress allowed the trust funds to run out. It also
analyzes two scenarios that assume Congress waits until the moment of insolvency to act,
showing the magnitude of benefit cuts or tax increases needed and how such changes would
affect beneficiaries.
Background
The Social Security Trust Funds
How the Trust Funds Work
Social Security provides retirement, disability, and survivor benefits to qualifying workers and
their families. These benefits are funded from two trust funds: the Old-Age and Survivors
Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund. The two funds operate
separately but are closely linked. This report generally assumes the merged operations of the
OASI and DI trust funds, treating the two funds as if they were one collective OASDI fund.

1 The 2012 Trustees Report projected trust fund exhaustion in 2033. Social Security Administration, 2012 Annual
Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds,
April 23, 2012, at http://www.socialsecurity.gov/OACT/TR/2012. Hereinafter cited as 2012 Social Security Trustees
Report.)
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Income to the Trust Funds
The trust funds receive income from several sources. Their primary income source is the Social
Security payroll tax levied on wages and self-employment income.2 Social Security-covered
employees and employers each pay 6.2% of wages up to the taxable maximum ($110,100 in
2012).3 By law, about 85% of Social Security payroll taxes are credited to the OASI trust fund
and about 15% are credited to the DI trust fund.4 The trust funds also receive income from
interest on the trust funds’ assets and from the taxation of Social Security benefits. In 2011,
82.8% of the trust funds’ income was from payroll taxes, 14.2% was from interest on trust fund
assets, and 3.0% was from taxation of benefits.5 The proportion of income from each of these
sources varies over time.6
Outgo from the Trust Funds
Almost all of the trust funds’ spending is for benefit payments and a small amount goes toward
administrative expenses. The trust funds are also party to a financial interchange with the
Railroad Retirement Board.7 This annual exchange of funds places the Social Security trust funds
in the same financial position in which they would have been if railroad service had been covered
by Social Security. In 2011, approximately 98.5% of the trust funds’ spending was for benefits,
less than 0.9% was for administrative costs, and approximately 0.6% was transferred to the
Railroad Retirement Board (RRB).8 The trust funds spend essentially the same proportion of
funds on each of these items each year.
Annual Cash Flow
If, in a given year, the trust funds take in more tax income (i.e., payroll taxes and federal income
taxes paid on benefits) than they spend, the trust funds have a cash-flow surplus. By law, surplus
revenues are invested in interest-bearing U.S. government securities—usually special issue

2 Payroll taxes are formally known as Federal Insurance Contributions Act (FICA) and Self-Employment Contributions
Act (SECA) taxes. FICA and SECA taxes also include a 1.45% payroll tax on each employee and employer for
Medicare Hospital Insurance.
3 Self-employed individuals pay 12.4% of wages up to the taxable maximum. The taxable maximum is indexed to the
Average Wage Index (AWI). Economists typically attribute both the employee and employer share of the payroll tax to
workers since it is assumed that the employer portion of the tax is passed on to workers in the form of lower wages. For
2010-2012, employees and the self-employed pay a lower rate of tax to reflect the 2% payroll tax holiday, with the trust
funds being reimbursed for the amount of the payroll tax holiday from general funds.
4 42 U.S.C. §401.
5 For the OASI trust fund, 81.6% of income was from payroll taxes, 15.2% was from interest on trust fund assets, and
3.2% was from taxation of benefits in 2011. For the DI trust fund, 91.1% of income was from payroll taxes, 7.4% was
from interest on trust fund assets, and 1.5% was from taxation of benefits in 2011. (Figures may not add to 100% due to
rounding.) Payroll taxes amount includes the General Fund transfer for the cost of the 2% payroll tax holiday.
6 The proportion of income from taxation of benefits is projected to increase over time as more people are subject to
taxation of benefits. (See CRS Report RL32552, Social Security: Calculation and History of Taxing Benefits, by
Christine Scott.)
7 See CRS Report RS22350, Railroad Retirement Board: Retirement, Survivor, Disability, Unemployment, and
Sickness Benefits, by Alison M. Shelton.
8 In 2011, about 98.7% of OASI trust fund spending was for benefits, less than 0.6% was for administrative costs, and
less than 0.7% was transferred to the RRB. In 2011, about 97.4% of DI trust fund spending was for benefits and about
2.2% was for administrative costs. (Figures may not add to 100% due to rounding.)
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Treasury bonds.9 In other words, Social Security’s cash surpluses (like proceeds from all
government bonds) are borrowed by the U.S. Treasury and can be used for tax cuts, spending, or
repaying debt. The Treasury, in turn, incurs an obligation to repay the bonds with interest, which
is also credited to the trust funds.
If, in a given year, the trust funds spend more than the tax income they receive, they have a cash-
flow deficit. In deficit years, Social Security can redeem any bonds (including interest)
accumulated in previous years. Treasury pays benefits with cash from general revenues and writes
down an equivalent amount of the trust fund’s bond holdings. In other words, when the Treasury’s
general fund is running a deficit, Congress would need to cut overall spending, raise taxes, or
borrow during years in which Social Security also has cash-flow deficits.
Trust Fund Solvency
If the trust funds are not able to pay all of current expenses out of current tax income and
accumulated trust fund assets, they are insolvent. Insolvency means that Social Security’s trust
funds are unable to pay full benefits on time. It does not mean that Social Security will be
completely broke and unable to pay any benefits.
Historical Trust Fund Operations
The OASI trust fund was established in 1937; the DI trust fund was established in 1957. Neither
of the Social Security trust funds has ever become insolvent. In 2011, the OASI trust fund had a
cash-flow deficit of about $11.4 billion, and the DI trust fund had a cash-flow deficit of $33.9
billion, for a combined cash-flow deficit of $45.4 billion. At the end of 2011, the combined trust
funds held a total of about $2.7 trillion in Treasury bonds.10
Cash-Flow Surpluses and Deficits
The trust funds have run annual cash-flow surpluses in most years. These annual surpluses were
typically small relative to the size of the trust funds’ expenditures. After the 1983 amendments to
the Social Security Act, which increased Social Security’s income and reduced its spending, the
OASI trust fund began to run larger surpluses. Prior to 1984, the combined trust funds had run
annual cash-flow deficits periodically, the last of which was in 1983.11 The trust funds made up
the difference between income and outgo during these years by redeeming some of the bonds
accumulated in earlier years. In other words, the Social Security trust funds received net transfers
from the Treasury’s general fund.
Near-Insolvency in the Early 1980s
The Social Security trust funds have never been exhausted. However, in the early 1980s, a
solvency crisis loomed for the OASI trust fund. The 1982 Social Security Trustees Report
projected that in the absence of legislative changes the OASI trust fund would become insolvent

9 See CRS Report RS20607, Social Security: Trust Fund Investment Practices, by Dawn Nuschler.
10 At the end of 2011, the OASI trust fund held $2.5 trillion and the DI trust fund held $153.9 billion.
11 See CRS Report RL33028, Social Security: The Trust Fund, by Dawn Nuschler and Gary Sidor.
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by July 1983.12 To relieve the pressure on the OASI trust fund temporarily, Congress permitted
the fund to borrow from the DI and Medicare Hospital Insurance (HI) trust funds.13 Money was
transferred to the OASI fund in 1982 and repaid by 1986.14 This temporary measure allowed
policymakers time to develop a more sustainable solution to Social Security’s solvency
problem—the 1983 amendments, which increased income from taxes and reduced benefits.15
Absent another act of Congress, the Social Security Act does not permit further interfund
borrowing.
The Trustees’ Projections
The Social Security trustees issue an annual report in which they describe their short- and long-
range projections of trust fund financial operations. The Trustees Report describes a range of
possible outcomes using different sets of demographic and economic assumptions, including
intermediate assumptions, high cost (pessimistic) assumptions, and low cost (optimistic)
assumptions. Each set of assumptions results in different projections of when the trust funds will
become insolvent.16 This CRS report focuses on the trustees’ long-range projections under their
intermediate assumptions, which reflect their “best estimates” of future trends. However, it is
important to note that the trustees’ projections—like all long-term projections—are uncertain.
Cash-Flow Projections
The combined trust funds began to have annual cash-flow deficits in 2010 that are projected to
continue in future years. When cash-flow deficits emerge, the trust funds need to redeem the
Treasury bonds accumulated during earlier years. Treasury pays benefits with cash from general
revenues and writes down an equivalent amount of the trust fund’s bond holdings. These transfers
create pressure on the overall federal budget.
Trust Fund Solvency Projections
According to the trustees’ intermediate projections, redemption of trust fund assets will allow the
trust funds to pay full benefits on time until 2033, when the trust funds will become exhausted.17
At that time, the trust funds will continue to receive tax income (i.e., payroll taxes and federal
income taxes on benefits). The trustees project that tax income will be sufficient to cover about
75% of scheduled benefits during the first year of trust fund insolvency in 2033. This will decline
to 73% of scheduled benefits in 2086.

12 Social Security Administration, 1982 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Disability Insurance Trust Funds, April 1, 1982. Hereinafter cited as 1982 Social Security Trustees
Report.
13 P.L. 97-123.
14 The OASI trust fund borrowed $17.5 billion in November and December of 1982; about $5.1 billion was from the DI
trust fund and $12.4 billion was from Medicare’s HI trust fund.
15 P.L. 98-21.
16 Under the intermediate assumptions, the combined trust funds are projected become insolvent in 2033. Under the low
cost assumptions, the trust funds are not projected to become insolvent within the 75-year projection period. Under the
high cost assumptions, the trust funds are projected to become insolvent in 2027. (2012 Social Security Trustees
Report, Table IV.B3.)
17 Under the trustees’ intermediate assumptions, the OASI trust fund is projected to become insolvent in 2035 and the
DI trust fund is projected to become insolvent in 2016.
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Legal Background on Trust Fund Insolvency
The Antideficiency Act
The Social Security Act specifies that benefit payments shall be made only from the trust funds
(i.e., accumulated trust fund assets).18 Another law, the Antideficiency Act, prohibits government
spending in excess of available funds.19 Consequently, if the Social Security trust funds become
insolvent—that is, if current tax income and accumulated assets are not sufficient to pay the
benefits to which people are entitled—the law effectively prohibits full Social Security benefits
from being paid on time.
Legal Entitlement to Social Security Benefits
The Social Security Act states that every individual who meets program eligibility requirements is
entitled to benefits.20 In other words, Social Security is an entitlement program, which means that
the government is legally obligated to pay Social Security benefits to all those who are eligible
for them as set forth in the statute.21 If the government fails to pay the benefits stipulated by law,
beneficiaries could take legal action. Insolvency would not relieve the government of its
obligation to provide benefits.
What Happens to Benefits in the Case of Insolvency?
The Antideficiency Act prohibits government agencies from paying for benefits, goods, or
services beyond the limit authorized in law for such payments. The authorized limit in law for
Social Security benefits is the balance of the trust fund. The Social Security Act does not stipulate
what would happen to benefit payments if the trust funds ran out. As a result, either full benefit
checks may be paid on a delayed schedule or reduced benefits would be paid on time.22
To see how a delay could affect beneficiaries, consider the current Social Security benefit
payment schedule, shown in Table 1. (This schedule may be changed at the discretion of the
Social Security Commissioner.) New beneficiaries’ payment dates are generally based on their
day of birth—for example, if a retired worker was born on the first of the month (e.g., June 1), his
or her benefit check is paid on the second Wednesday in the month.23 If trust fund insolvency

18 42 U.S.C. §401(h).
19 31 U.S.C. §1341.
20 42 U.S.C. §§402 and 423.
21 However, Congress retains the right to modify provisions of the Social Security Act at any time, which could affect
the benefits current and future beneficiaries may receive. (42 U.S.C. §1304.) For more details, CRS Report RL32822,
Social Security Reform: Legal Analysis of Social Security Benefit Entitlement Issues, by Kathleen S. Swendiman and
Thomas J. Nicola.
22 It seems most likely that benefits would be delayed (thus reducing the number of full benefit checks paid each
month). It is unclear whether the Social Security Commissioner or the other trustees would have the authority to reduce
the benefit amounts specified by law. The 1982 Trustees Report, which projected impending trust fund insolvency,
stated that unless legislative changes were made, “inability to pay some benefits on time would result.” (1982 Trustees
Report, p. 2, emphasis added.)
23 For beneficiaries who receive Social Security benefits based on another person’s work record (e.g., spouse benefits),
their payment date depends on the birth date of the worker on whose record they receive benefits. The current benefit
payment schedule was first implemented for new beneficiaries in May 1997. By 2033, the number of beneficiaries
(continued...)
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caused delays in the benefit payment schedule, benefit checks could be paid in the usual order—
first to those who receive benefits on the third of the month, then to those on the second
Wednesday of the month, and so on, until the balance of the trust funds’ balance reached zero. At
that point, no benefits could be paid until more tax receipts were credited to the trust funds. Then
benefit payments could be picked up where they left off when the trust funds ran out. This cycle
could continue indefinitely. The timing of these checks would be unpredictable.
Table 1. Current Social Security Benefit Payment Schedule
Benefits Paid On
Birth Date of Worker on Whose Record Benefits are Paid
Third of every month
Any birth date for:
(1) Beneficiaries who receive both Social Security and SSI benefits;
(2) Most beneficiaries who began to receive benefits prior to May 1997.
Second Wednesday
1st to 10th day of the month
Third Wednesday
11th to 20th day of the month
Fourth Wednesday
21st to 31st day of the month
Source: Social Security Administration.
Note: For beneficiaries scheduled to receive payments on the third of the month, benefits may be paid earlier if
the third is on a weekend or holiday.
What If Congress Waits to Act?
There are many options to restore Social Security solvency, which could be combined or targeted
in a variety of ways. For example, Congress could decrease Social Security spending. Because
almost 99% of Social Security spending is on benefits, this essentially means cutting benefits.
Benefit cuts could be applied proportionately to all beneficiaries or structured to protect certain
beneficiaries (e.g., disabled or low-income beneficiaries). Congress could also increase Social
Security’s income by raising tax revenue (e.g., raising payroll tax rates or the amount of wages
taxed), boosting income (e.g., investing surpluses in stocks), or adding a new source of revenue
(e.g., transferring funds from the Treasury’s general fund). Tax increases could be applied
proportionately to all workers or targeted to certain workers (e.g., those who earn more than the
taxable maximum).
Over the long range (i.e., 75 years), the Social Security trustees project a shortfall of $8.6 trillion
in present value terms, or 2.67% of taxable payroll. The next section presents two of the policy
options Congress could choose to fill this gap:
• The benefit cut scenario assumes that Congress covers the annual cash-flow
deficit by cutting benefits across the board.
• The tax increase scenario assumes that Congress covers the annual cash-flow
deficit by raising the payroll tax rate.
Both scenarios assume that Congress waits until the trust funds become insolvent to make
changes. If made sooner, the changes could be smaller, since earlier changes could be spread to a

(...continued)
being paid each week of the month will be approximately equal.
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larger number of workers and beneficiaries over a longer period of time.24 Either scenario would
essentially convert Social Security to a pure pay-as-you-go system, in which income and outgo
are equal on an annual basis and there are no trust fund assets. These scenarios are only two of a
wide range of possibilities.
Benefit Cut Scenario
Size of Benefit Cuts
If the trust funds were allowed to run out, Congress could eliminate annual cash-flow deficits by
cutting benefits so that spending equals tax income on an annual basis. According to the trustees,
achieving annual balance would require benefit cuts of 25% in 2033, the first year of insolvency,
rising to 27% by 2086. To maintain balance after 2086, the Social Security trustees project that
larger benefit reductions would be needed, since the aging of the U.S. population, among other
factors, is causing the cost of Social Security to grow over time. Figure 1 shows the percentage
of scheduled benefits that are payable each year with scheduled revenues.

24 The trustees estimate that 75-year solvency could be restored through an immediate payroll tax increase of 2.61
percentage points (split between employers and employees) or benefit reduction of about 16.2% (for all current and
future beneficiaries). These changes are about half as large as those required in 2033. (2012 Social Security Trustees
Report.)
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Figure 1. Scheduled Benefits Payable at Current Law Payroll Tax Rates, 2012-2086
120%
100%
efits
n
80%
ed Be
dul
60%
che
S
of
tage
40%
en
erc
P
20%
0%
5
8
1
4
7
30
3
6
2
5
54
1
4
2012 201 201 202 202 202 20
203 203 2039 204 204 2048 2051 20
2057 2060 2063 2066 2069 2072 2075 2078 208 208
Calendar Year

Source: Social Security Administration memorandum by Chris Chaplain and Daniel Nickerson, “Present-Law
OASDI Payable Percentages: Present-Law Revenue as a Percent of the Cost of Providing Scheduled Benefits for
Years 2033 through 2086,” June 1, 2012. (Hereinafter cited as SSA Payable Benefits Memo.)
Note: The trustees project that more than 100% of scheduled benefits could be payable prior to 2033.
Impact of Benefit Cuts
There are several ways to measure how beneficiaries would be affected under the benefit cut
scenario. This report analyzes projected replacement rates and real benefit amounts for a series of
hypothetical workers developed by the actuaries at the Social Security Administration (SSA).
Replacement Rates
One way to illustrate the effect of across-the-board benefit cuts on beneficiaries is to use
replacement rates. A replacement rate is a comparison between a person’s income before and
after retirement; it is one way of measuring the adequacy of a person’s post-retirement income.
Replacement rates can be calculated in different ways. This report uses the same methodology as
SSA’s actuaries, which is to calculate a worker’s initial Social Security benefit as a percentage of
his or her average indexed monthly earnings, thus showing the proportion of earnings replaced by
benefits.25 Benefits tend to replace a higher proportion of lower earners’ wages than of higher
earners’ wages since the Social Security benefit formula is progressive. In 2012, the estimated

25 This formula uses the highest 35 years of earnings covered by Social Security, indexed to wages using the Average
Wage Index (AWI).
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replacement rate for a medium earner retiring at the age of 65 is 40.8%. Under current law,
beneficiaries’ replacement rates at the age of 65 are gradually decreasing as the full retirement age
(FRA) gradually increases from 65 to 67. Although benefits are available between the ages of 62
and FRA, the benefit amount is reduced.
Replacement rates are an important measure of the adequacy of Social Security benefits. Social
Security was established to replace income lost to a family as a result of the retirement, death, or
disability of a worker. To ensure that benefit levels keep up with increases in wages over time—
thus providing a steady replacement rate to beneficiaries—initial Social Security benefits are
indexed to wage growth. Historically, wages have generally risen faster than prices, which has
allowed the standard of living to rise from one generation to the next.26 Indexing initial Social
Security benefits to wages has allowed beneficiaries to reap the benefits of rising living
standards.27 Replacement rates show the extent to which initial Social Security benefits keep up
with wage growth and with rising standards of living.
Figure 2 shows projected replacement rates under the benefit cut scenario for a hypothetical low,
medium, and high earner.28 The low earner is assumed to have earned 45% of the national
average wage during each year of his or her career (about $20,090 in 2012) and to receive a
monthly Social Security benefit of about $887 in 2012.29 The medium earner is assumed to have
earned the average wage during each year of his or her career (about $44,644 in 2012) and to
receive a monthly Social Security benefit of about $1,461 in 2012. The high earner is assumed to
have earned 160% of the average wage during each year of his or her career (about $71,430 in
2012) and to receive a monthly Social Security benefit of about $1,938 in 2012. Each year in the
graph shows the projected replacement rate for each beneficiary if he or she turned 65 years old
and retired in January of that year.
Replacement rates for the beneficiaries in this example are projected to decline in the near term.
Between 2012 and 2033, replacement rates are projected to decrease about 11%.30 This decline is
mostly due to the increase in the full retirement age over the period. Combining the projected
percentage of benefits that will be payable (the benefit cut scenario) with the replacement rates
results in an effective (payable) replacement rate in 2033, the first year of insolvency, being 25%
lower than if the trust funds were solvent.

26 The standard of living is usually measured in terms of income and reflects the quality of life that people enjoy,
including factors such as the quality of housing, medical care, transportation, and communication.
27 For more information on how benefits are indexed, CRS Report RL32900, Indexing Social Security Benefits: The
Effects of Price and Wage Indexes, by Patrick Purcell, Neela K. Ranade, and Laura Haltzel.
28 For information on the development of the hypothetical workers, see Social Security Administration, Office of the
Chief Actuary, Actuarial Note Number 144, “Internal Rates of Return Under the OASDI Program for Hypothetical
Workers,” by Orlo R. Nichols, et al., June 2001, at http://www.ssa.gov/OACT/NOTES/note2000s/note144.html.
29 The average wage is defined by SSA’s Average Wage Index.
30 Initial replacement rates are estimated to be 55.0% for the low earner, 40.8% for the medium earner, and 33.8% for
the high earner in 2012.
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Figure 2. Replacement Rates Under Benefit Cut Scenario, 2012-2086
0.6
0.5
0.4
ate
t R
cemen 0.3
la
ep
itial R 0.2
In
0.1
0
2
8
4
3
9
5
4
0
6
5
8
1
201 2015 201 2021 202 2027 2030 203 2036 203 2042 204 2048 2051 205 2057 206 2063 206 2069 2072 207 207 208 2084
Calendar Year

Source: Congressional Research Service calculations, using figures from the 2012 Social Security Trustees Report
and the SSA Payable Benefits Memo.
Notes: The workers in this figure are assumed to retire at age 65. The age at which beneficiaries may receive
full Social Security benefits is currently rising from 65 to 67, so the early retirement reduction for workers in this
example would increase over time.
Real Benefit Levels
Another way to illustrate the effect of across-the-board benefit cuts is to look at projected initial
annual benefit amounts in real terms (i.e., after adjusting for inflation). Since benefits are based
on workers’ lifetime earnings, higher earners tend to receive higher benefit amounts than lower
earners.
The change in real benefit levels over time illustrates how well Social Security benefits are
projected to keep up with inflation (i.e., price growth). The real benefit levels in Figure 3 show
future initial benefit amounts in 2012 dollars—in other words, they illustrate the extent to which
future beneficiaries could afford today’s living standards. Wages are expected to grow faster than
prices over the long term, which would allow living standards to rise. Real benefit levels do not
show the extent to which future beneficiaries could afford these rising living standards.
The trustees project that Social Security benefits will rise as a result of growing wages, causing
initial real benefit amounts to increase about 20.7% between 2012 and 2033.31

31 Annual real benefits are estimated to be $10,648 for the low earner, $17,534 for the medium earner, and $23,255 for
(continued...)
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Social Security: What Would Happen If the Trust Funds Ran Out?

Under the benefit cut scenario, real payable benefit levels are projected to drop significantly after
the trust funds become insolvent, then to rise gradually. Between 2032, the last full year of
projected trust fund solvency, and 2033, the first full year of projected insolvency, payable real
benefit levels are projected to decline by 25%.32
Figure 3. Initial Annual Benefits Payable Under Benefit Cut Scenario, 2012-2086
$40,000
$35,000
$30,000
e
bl $25,000
aya
fits P $20,000
ne
al Be $15,000
nnu
A
$10,000
$5,000
$0
2
5
8
1
4
27
30
33
201 201 201 202 202 20
20
20
2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 2066 2069 2072 2075 2078 2081 2084
Calendar Year

Source: Congressional Research Service calculations, using figures from the 2012 Social Security Trustees Report
and the SSA Payable Benefits Memo.
Note: Please see notes for Figure 2.
Tax Increase Scenario
Size of Payroll Tax Rate Increases
Congress could also eliminate cash-flow deficits by raising the payroll tax rate so that the trust
funds’ tax income would equal spending each year. The trustees project that taking such an action
at the point of insolvency would require combined employee and employer payroll taxes to
increase from their current rate of 12.4% to 16.7% in 2033, the year in which the trust funds are
projected to be exhausted, rising to 17.1% by 2086, the last year for which the trustees have

(...continued)
the high earner in 2012.
32 In 2033, annual scheduled real benefits are projected to be $12,848 for the low earner, $21,181 for the medium
earner, and $28,073 for the high earner. The payable real benefits would be 75% of these amounts.
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Social Security: What Would Happen If the Trust Funds Ran Out?

projections. To maintain balance after 2086, the Social Security trustees project that the payroll
tax rate would likely need to increase further. This is because the cost of Social Security is
expected to grow, due to U.S. population aging and the design of the Social Security system.
Figure 4 shows the payroll tax rates needed to pay scheduled benefits each year from 2012 to
2086.
Figure 4. Combined Payroll Tax Rate Needed To Fund Scheduled Benefits, 2012-2086
18.00%
16.00%
ate 14.00%
R
ax
ll T 12.00%
o
yr
Pa 10.00%
rity
8.00%
l Secu
a
ci
So
6.00%
ed
in
mb
4.00%
o
C
2.00%
0.00%
5
8
4
3
6
9
2
54
57
0
3
8
1
2012 201 201 2021 202 2027 2030 203 203 203 204 2045 2048 2051 20
20
206 206 2066 2069 2072 2075 207 208 2084
Calendar Year

Source: CRS calculations, using figures from the 2012 Social Security Trustees Report.
Note: The trustees project that more than 100% of scheduled benefits could be payable prior to 2033.
Impact of Payroll Tax Increases
Raising the payroll tax rate would increase most workers’ taxes by the same proportion. However,
since covered wages are taxable only up to a specified maximum ($110,100 in 2012), the
effective increase in the payroll tax would be smaller for people who earn more than the taxable
maximum than for other workers. About 6% of workers currently earn more than the taxable
maximum.33 Unlike the federal income tax, the Social Security payroll tax is levied at a flat rate
starting at the first dollar of wages. As a result of this flat structure and the cap on taxable wages,
the Social Security payroll tax places a relatively greater burden on low- and middle-income
workers.34

33 See CRS Report RL32896, Social Security: Raising or Eliminating the Taxable Earnings Base, by Janemarie
Mulvey.
34 In 2006, about 66% of tax filers owed more in combined payroll taxes than in individual income taxes. (“Two-Thirds
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Social Security: What Would Happen If the Trust Funds Ran Out?

Conclusion
The consequences of allowing the trust funds to become insolvent can be avoided if Congress
makes changes to Social Security. The sooner Congress acts, the smaller the changes need to be.
If Congress acted today, the benefit cuts or tax increases necessary to restore solvency until 2086
would be about half as large as those needed if Congress waited until the trust funds became
insolvent. Prompt action would also allow Congress to gradually phase in changes, rather than
abruptly cutting benefits or raising taxes, thus allowing workers to plan in advance for their
retirements. Another reason to act sooner rather than later is that the combined trust funds began
to run annual cash-flow deficits each year beginning in 2010, requiring the trust funds to redeem
the bonds that they have accumulated in surplus years. Cash-flow deficits do not affect Social
Security directly, but the redemption of the trust fund bonds puts pressure on the overall federal
budget, which is in deficit.

Acknowledgments
An earlier version of this paper was written by Kathleen Romig. All questions should be directed to the
current author.


(...continued)
of Tax Units Pay More in Payroll Tax Than in Income Tax,” Tax Facts from the Tax Policy Center, by Leonard E.
Burman and Greg Leiserson, April 9, 2007, at http://www.taxpolicycenter.org/UploadedPDF/1001065_Tax_Units.pdf.)
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