It’s hard to overstate the catastrophic impact that Social Security insolvency would have on the middle class. Social Security currently provides essential benefits to over 66 million Americans, and according to a recent survey, 77% of recipients depend on these payments to cover basic necessities.
Its important to understand that the federal government has never actually “raided” the Social Security Trust Fund; instead, when there is a surplus in the Social Security system, the government essentially “borrows” money from the trust fund by issuing special bonds, which are then repaid with interest when needed to pay benefits, meaning the funds are technically still considered to belong to Social Security and are not diverted for general government spending.
Key point to remember:
- Technicality of “borrowing”:
When the government “borrows” from Social Security, it is not taking the money and spending it elsewhere; it is essentially issuing debt to the Social Security Trust Fund, which is then repaid with interest.
As of early 2024, the Social Security Trust Fund holds approximately $2.79 trillion in U.S. Treasury securities. However, in 2021 Social Security started “drawing down bonds” and is projected to run out of funds, become “insolvent” by 2035, according to the Congressional Budget Office’s 2024 report. Drawing down bonds means redeeming bonds to fill the funding shortfall.
Key points about Social Security drawing down bonds:
- Start date: 2021
- Reason: The cost of Social Security benefits surpassed the amount of payroll taxes collected. In 2024, total FICA tax collected was $1.35 trillion. Total benefits paid out was about $1.6 trillion.
- Impact: The trust fund balance will gradually decrease as bonds are redeemed to pay benefits
What Could Happen if Social Security Becomes Insolvent?
- Delayed Payments: The federal government would be unable to pay full benefits on time.
- Reduced Benefits: Beneficiaries could see their payments cut by as much as 25%.
- Budget Shortages: The government would be forced to live within its available funds, creating significant financial strain for those who rely on Social Security for survival.
How Could Social Security Insolvency Be Addressed?
To prevent this crisis, Congress must act swiftly. Potential solutions include:
- Increasing the Maximum Wages Subject to Payroll Tax: Raising the income threshold for Social Security taxes would help generate more revenue.
- Broadening the Tax Base: Expanding the types of income that are taxed could further increase the system’s funds.
- Raising the retirement age: This is a common proposal to ensure people contribute to the system for a longer period before receiving benefits.
- Benefit adjustments for high earners: Some proposals suggest reducing Social Security benefits for individuals with high incomes.
- 5. Means testing: This would limit benefits based on income level, potentially providing more support to lower-income retirees.
- 6. COLA adjustments:
Modifying how cost-of-living adjustments are calculated could impact benefit
Congress must act now to ensure Social Security remains a reliable safety net for millions of Americans. The longer we wait, the greater the risk of financial hardship for millions of beneficiaries.
