Social Security’s Funding Shortfall



Updated May 5, 2020
Social Security’s Funding Shortfall
Overview

also receives interest income on the asset reserves held by
Social Security provides monthly cash benefits to retired or
the Social Security trust funds (7.6%) and a small amount
disabled workers, their family members, and family
(less than 1%) of other income (including reimbursements
members of deceased workers. Many people of all ages
from the U.S. Treasury’s general fund).
have some connection to the program, including an
estimated 178 million covered workers and approximately
Social Security coverage is nearly universal, with an
64.5 million beneficiaries in 2020.
estimated 93% of all workers participating in the system in
2020. The Social Security payroll tax rate is 12.4%, divided
The program’s income and outgo are accounted for with the
evenly between the worker and the employer; the tax is
Social Security trust funds. They represent funds dedicated
applied to the worker’s earnings up to an annual limit
to pay current and future Social Security benefits. In 2019,
($137,700 in 2020). Any covered earnings above the annual
the program had total income of $1,062 billion (92.4% from
limit are not subject to the Social Security payroll tax and
dedicated tax revenues), total expenditures of $1,059 billion
are not counted in the worker’s benefit computation. Social
(98.9% for benefit payments), and trust fund reserves of
Security benefits are intended to replace part of a worker’s
$2.9 trillion (U.S. Treasury securities) available for future
earnings. As such, a worker’s benefit is based on his or her
program spending. Under the 2020 intermediate
career-average earnings in covered employment (i.e.,
assumptions, the Social Security Board of Trustees project,
earnings subject to the Social Security payroll tax) and a
with these asset reserves, the trust funds to remain “solvent”
progressive benefit formula that is intended to provide
until 2035 (the 2020 intermediate assumptions reflect the
adequate benefit levels for workers with low career-average
trustees’ understanding of Social Security at the start of
earnings.
2020; it does not include potential effects of the
Coronavirus Disease 2019, or COVID-19). That is, until
Issue Before Congress
that time, the trust funds are projected to be able to pay full
benefits scheduled under current law on a timely basis. In
 Over its 85-year history, Social Security has col ected $23.0
2035, however, the trust fund reserves are projected to be
tril ion and paid out $20.1 tril ion, leaving trust fund asset
depleted. While the program would continue to operate
reserves of $2.9 tril ion.
with scheduled tax revenues, those revenues are projected
 Projections show that Social Security wil be unable to pay
to cover about 79% of scheduled benefits through the end
scheduled benefits in ful and on time starting in 2035,
of the projection period (2094). It is unclear how the U.S.
primarily due to demographic factors.
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
For many years, Social Security collected more tax
driven largely by demographic factors. Declines in fertility
and increases in longevity result in a lower ratio of workers
revenues than needed to pay benefits, resulting in the
accumulation of trust fund asset reserves (held in the form
to beneficiaries (projections show the ratio of workers
of interest-bearing U.S. Treasury securities) available for
paying into the system to support each beneficiary is
estimated to fall from 2.8 in 2018 to 2.3 in 2035). Changes
future program spending. Starting in 2010, however, Social
Security’s total expenditures began to exceed noninterest
to Social Security have long been an issue of interest to
income (i.e., cash-flow deficits emerged), requiring the
Congress from a trust fund solvency perspective. Policy
proposals to address Social Security’s projected funding
program to draw on trust fund reserves to pay scheduled
benefits. The trustees project that Social Security will
shortfall typically include a combination of revenue
continue to run cash-flow deficits throughout the 75-year
increases and benefit adjustments. Although the process of
selecting specific program changes would likely involve
projection period (2020-2094) and that annual cash-flow
deficits will grow markedly over time. For example, the
intense debate in Congress, policymakers generally agree
program’s cash-flow deficit was $78 billion in 2019 and is
that taking legislative action sooner rather than later could
mitigate the effects on workers and beneficiaries and allow
projected to be $460 billion in 2034 (constant 2020 dollars).
people as much time as possible to adjust to the changes.
(2020 Social Security Trustees Report, intermediate
assumptions.)
How Is Social Security Financed?
In 2021, Social Security’s cost is projected to exceed total
Social Security is a self-financing program. Of its total
income (i.e., tax revenues plus interest income). Trust fund
income, 92.4% is from dedicated tax revenues: (1) payroll
taxes paid by employers, employees, and self-employed
reserves are projected to decline steadily from their peak of
$2.9 trillion to zero in 2035. Following the depletion of
individuals; and (2) federal income taxes paid by about half
trust fund reserves, scheduled tax revenues are projected to
of beneficiaries on a portion of their benefits. The program
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Social Security’s Funding Shortfall
be sufficient to pay 79% of scheduled benefits initially,
trust funds receive a sufficient amount of tax revenues to
declining to 73% by 2094.
pay full benefits, unless Congress amends applicable laws.
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
3.21% 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% of GDP.
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,
only the estimated 6% of covered workers who have
however, is projected to increase markedly over the next
earnings above the current taxable wage base, while
two decades (from about 14% to 18%) primarily due to
increasing the payroll tax rate would affect all covered
demographic trends. Economic factors—such as the 2008
workers. From a political perspective, public opinion
recession, which led to lower taxable earnings and more
regarding different options can vary among constituencies.
beneficiaries than expected—play a role. However,
according to the trustees, demographic factors alone would
What Is the Timeframe 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 16 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 2020 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 3.14 percentage point increase in the
borrow from the general fund of the U.S. Treasury to make
payroll tax rate (from 12.40% to 15.54%) or
up for any funding shortfalls; such borrowing would require
legislative action. Yet, the United States is legally obligated
 an immediate 19% reduction in scheduled benefits for
to make Social Security payments to any person who meets
all current and future beneficiaries (or a 23% reduction
the eligibility requirements established in Title II of the
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 in Social Policy
beneficiaries would have to wait until the Social Security
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Social Security’s Funding Shortfall


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