Social Security’s Funding Shortfall

Social Security’s Funding Shortfall

Updated May 10, 2023
Social Security’s Funding Shortfall
Overview
(less than 1%) of other income (including reimbursements
Social Security provides monthly cash benefits to retired or
from the U.S. Treasury’s general fund).
disabled workers, their family members, and family
members of deceased workers. Many people of all ages
Social Security coverage is nearly universal, with an
have some connection to the program, including an
estimated 94% of all workers participating in the system in
estimated 183 million covered workers and over 66 million
2023. The Social Security payroll tax rate is 12.4%, divided
beneficiaries in 2022.
evenly between the worker and the employer; the tax is
applied to the worker’s earnings up to an annual limit
The program’s income and outgo are accounted for with the
($160,200 in 2023). Any covered earnings above the annual
Social Security trust funds. They represent funds dedicated
limit are not subject to the Social Security payroll tax and
to pay current and future Social Security benefits. In 2022,
are not counted in the worker’s benefit computation. Social
the program had total income of $1.22 trillion (94.6% from
Security benefits are intended to replace part of a worker’s
dedicated tax revenues), total expenditures of $1.24 trillion
earnings. As such, a worker’s benefit is based on his or her
(99.0% for benefit payments), and trust fund reserves of
career-average earnings in covered employment (i.e.,
$2.83 trillion (U.S. Treasury securities) available for future
earnings subject to the Social Security payroll tax) and a
program spending. Under the 2023 intermediate
progressive benefit formula that is intended to provide
assumptions, the Social Security Board of Trustees project,
adequate benefit levels for workers with low career-average
with these asset reserves, the trust funds to remain “solvent”
earnings.
until 2034 (the 2023 intermediate assumptions reflect the
trustees’ understanding of Social Security at the start of
Issue Before Congress
2023). That is, until 2034, the trust funds are projected to be
able to pay full benefits scheduled under current law on a
• Over its 88-year history, Social Security has col ected $26.40
timely basis. In 2034, however, the trust fund reserves are
tril ion and paid out $23.57 tril ion, leaving trust fund asset
projected to be depleted. While the program would continue
reserves of $2.83 tril ion.
to operate with scheduled tax revenues, those revenues are
• Projections show that Social Security wil be unable to pay
projected to cover about three-fourths of scheduled benefits
scheduled benefits in ful and on time starting in 2034,
through the end of the projection period (2097). It is unclear
primarily due to demographic factors.
how the U.S. Treasury would handle the payment of
scheduled benefits under such a scenario.
What Is Social Security’s Projected
Financial Outlook?
Social Security’s projected long-range funding shortfall is
driven largely by demographic factors. Declines in fertility
For many years, Social Security collected more tax
revenues than needed to pay benefits, resulting in the
and increases in longevity result in a lower ratio of workers
accumulation of trust fund asset reserves (held in the form
to beneficiaries (projections show the ratio of workers
paying into the system to support each beneficiary is
of interest-bearing U.S. Treasury securities) available for
future program spending. Starting in 2010, however, Social
estimated to fall from 2.7 in 2023 to 2.4 in 2034). Changes
Security’s total expenditures began to exceed noninterest
to Social Security have long been an issue of interest to
Congress from a trust fund solvency perspective. Policy
income (i.e., cash-flow deficits emerged), requiring the
proposals to address Social Security’s projected funding
program to rely on interest income to pay scheduled
benefits. Starting in 2021, Social Security’s total
shortfall typically include a combination of revenue
increases and benefit adjustments. Although the process of
expenditures began to exceed total income (i.e., annual
deficits emerged), requiring the program to draw on trust
selecting specific program changes would likely involve
fund reserves to pay scheduled benefits. The trustees
intense debate in Congress, policymakers generally agree
that taking legislative action sooner rather than later could
project that Social Security will continue to run cash-flow
deficits throughout the 75-year projection period (2023-
mitigate the effects on workers and beneficiaries and allow
people as much time as possible to adjust to the changes.
2097) and that annual cash-flow deficits will grow
markedly over time. For example, the program’s cash-flow
How Is Social Security Financed?
deficit was $88.5 billion in 2022 and is projected to be
$440.1 billion in 2033 (in current dollars) (2023 Social
Social Security is a self-financing program. Of its total
Security Trustees Report, intermediate assumptions).
income, 94.6% is from dedicated tax revenues: (1) payroll
taxes paid by employers, employees, and self-employed
Trust fund reserves are projected to decline steadily from
individuals; and (2) federal income taxes paid by about half
of beneficiaries on a portion of their benefits. The program
their peak of $2.9 trillion to zero in 2034. Following the
depletion of trust fund reserves, scheduled tax revenues are
also receives interest income on the asset reserves held by
projected to be sufficient to pay 80% of scheduled benefits
the Social Security trust funds (5.4%) and a small amount
initially, declining to 74% by 2097.
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Social Security’s Funding Shortfall
Social Security’s cost is projected to increase faster than
What Can Be Done to Restore Balance?
income over the 75-year period; cost is projected to exceed
Over the years, policymakers have put forth numerous
income by at least 20%. Expressed in other ways, Social
proposals to balance Social Security’s finances and achieve
Security’s projected 75-year actuarial deficit is equal to
other objectives. Such proposals typically include a
3.61% of taxable payroll (total earnings subject to the
combination of revenue increases and benefit adjustments.
Social Security payroll tax with some adjustments) or about
In the past, some proposals would have established a
1.3% of gross domestic product.
personal account component to the Social Security system
to supplement or replace traditional Social Security
What Is Driving the Projected Funding
benefits. Some of the more commonly discussed proposals
Shortfall?
include increasing the amount of covered earnings subject
Social Security’s future income and costs are determined by
to the payroll tax (the taxable wage base), increasing the
many demographic, economic, and program-specific
payroll tax rate, raising the retirement age, modifying the
factors. These factors include birth rates, death rates,
benefit formula, and changing the annual cost-of-living
immigration, employment rates, productivity gains, wage
adjustment (COLA) calculation.
growth, price growth, interest rates, disability benefits claim
rates, and program design features. Among other things,
Striking a balance between Social Security’s future revenue
they affect the number of covered workers and their level of
and benefit streams can prove challenging. From a policy
earnings, as well as the size and makeup of the beneficiary
perspective, for example, an increase in either the taxable
population and the level of monthly benefits.
wage base or the payroll tax rate could provide an equal
amount of additional revenues. These two options,
The trustees project that the program’s income rate (i.e.,
however, would affect different groups within the
income as a percentage of taxable payroll) will be stable at
population. Increasing the taxable wage base would affect
about 13% throughout the 75-year period. The cost rate,
the estimated 6% of covered workers who have earnings
however, is projected to increase markedly over the next
above the current taxable wage base, while increasing the
two decades (from about 14% to 18%) primarily due to
payroll tax rate would affect all covered workers. From a
demographic trends. Economic factors—such as recessions,
political perspective, public opinion regarding different
which generally lead to lower taxable earnings and more
options can vary among constituencies.
beneficiaries than expected—play a role. However,
according to the trustees, demographic factors alone would
What Is the Time Frame for Action?
cause the cost rate to increase markedly in coming years.
Social Security is the primary source of retirement income
for many beneficiaries. Given projections showing that in
The cost of the Social Security program is projected to
less than 12 years scheduled benefits cannot be paid in full
increase faster than income primarily due to a decline in the
and on time, and the magnitude of the projected funding
number of workers paying into the system relative to the
shortfall, policymakers generally agree that legislative
number of beneficiaries. Over the next 20 years, the
action should be taken sooner rather than later. As stated in
worker-to-beneficiary ratio is projected to decline as the
their 2023 annual report to Congress, “The Trustees
baby-boom generation moves into retirement and is
recommend that lawmakers address the projected trust fund
replaced with workers from lower-birth-rate generations.
shortfalls in a timely way in order to phase in necessary
Although projected increases in life expectancy play a role,
changes gradually and give workers and beneficiaries time
the trustees point to the shift in the population’s age
to adjust to them. Implementing changes sooner rather than
distribution due to lower birth rates as the dominant factor
later would allow more generations to share in the needed
in increased program cost over the next 75 years.
revenue increases or reductions in scheduled benefits.”
What Happens to Benefits if Trust Fund
To illustrate the magnitude of changes needed to maintain
Reserves Are Depleted?
Social Security solvency over the next 75 years, the trustees
Such a scenario has not occurred in the past, raising
point out hypothetically two options that it would take:
questions about how the Treasury would handle scheduled
benefit payments. Social Security does not have authority to
• an immediate 3.44 percentage point increase in the
borrow from the general fund of the U.S. Treasury to make
payroll tax rate (from 12.40% to 15.84%) or
up for any funding shortfalls; such borrowing would require
legislative action. Yet, the United States is legally obligated
• an immediate 21.3% reduction in scheduled benefits for
to make Social Security payments to any person who meets
all current and future beneficiaries (or a 25.4%
the eligibility requirements established in Title II of the
reduction for newly-eligible beneficiaries only).
Social Security Act, and the act states that benefits shall be
paid only from the Social Security trust funds. At the same
For more information, see CRS Report RL33028, Social
time, the Antideficiency Act prevents an agency from
Security: The Trust Funds.
paying more in benefits than the amount in the source of
funds available to pay the benefits. It appears that
Barry F. Huston, Analyst Social Policy
beneficiaries would have to wait until the Social Security
trust funds receive a sufficient amount of tax revenues to
IF10522
pay full benefits, unless Congress amends applicable laws.

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Social Security’s Funding Shortfall

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