What Are The Social Security Trust Funds And Why Are They Depleting?

Although it may sometimes look like the US government is basically impervious to financial problems, the reality is that even the most powerful nation in the world is not safe from the current global financial situation. 

Take Social Security, for example. This program pays out benefit payments to people with disabilities and retired workers, yet the trust funds from which these dollars are paid are slowly depleting. While it may seem these payments could never stop, the news that the program has solvency issues has shaken most citizens to the core.

So what’s the situation with Social Security? What are the Social Security trust funds and why are they drying up? 

Continue reading and you’ll learn more about how this program works and whether the dire situation with the trust funds will have any impact on your future.

What are the Social Security trust funds?

In simple terms, the US government relies on two accounts (Disability Insurance Trust Fund and Old-Age and Survivors Insurance) to manage contributions made by the citizens to the Social Security system. These accounts contain payroll tax contributions from employers and workers, as well as self-employment taxes contractors all around the US diligently pay for. 

Social Security is using these trust funds to make scheduled payments to people with disabilities and retired workers. Any surplus funds are then rerouted to interest-bearing federal debt obligations used to provide the trust funds with additional income. In other words, the trust funds are created in order to hold surplus funds necessary to pay Social Security benefits whenever needed. 

At the time of writing, both employers and employees pay 6.2% out of the employee’s earnings to the Social Security trust funds. Self-employed individuals pay double to account for both employer and employee shares (12.4%).

At the end of the fourth quarter of 2022, the reserves in the Social Security trust funds were around $2.82 trillion - a dollar amount that’s pretty hard to comprehend.

So how is it possible the experts are projecting that the trust funds will run out of money in 2034?

What’s happening to the trust funds?

Now that you know what are the Social Security trust funds, the logical next step is clarifying why they are depleting. Back in 2021, the funds started falling into deficit because the cost exceeded the overall income. 

Since Baby Boomers are retiring, they’ll contribute fewer and fewer tax contributions to the funds, so it’s expected the shortfall will continue. 

Because of a significant decline in disability claims, the Disability Insurance fund will continue to have funding until 2097. Sadly, this isn’t the case with Old-Age and Survivors Insurance, which will most likely run out of surplus funds around 2033. The combined income for both funds is expected to cover 80% of the benefits in 2034. 

This is nothing new though, as Congress has raised tax rates on payroll in the past to ensure these funds stay solvent. This is the most likely scenario again, and many experts anticipate that Congress may address the shortfall by either cutting benefits or borrowing additional funds to maintain the current amount of benefits without increasing the receipt - or a combination of the two. 

At the moment, the cost of benefits for disabled and retired persons is approximately $1,388 billion. Government officials anticipate the income entering the trust funds will be $1,335 billion by the end of the year. Quick math says that’s a $53 billion deficit. 

Does this affect Medicare benefits?

Medicare Part A benefits for post-acute and inpatient care will most likely remain fully payable until 2031. The payable amount of these benefits is expected to decline by 81% by 2047, but the percentage will most likely bounce back to 96% by 2097. Since Parts B and D of Medicare are subject to premiums, the benefits will without a doubt remain in good standing, so to speak. 

How will the shortfall in the funds affect the American citizens?

If you’re approaching retirement or receiving any type of benefits, it’s understandable if you’re anxious about what’s happening right now. However, even if the trust fund is fully depleted, it doesn’t matter as you won’t stop receiving your benefits. Since Social Security payroll taxes will still be in effect, the funds collected will be payable to disabled individuals and retirees.

This doesn’t mean cuts won’t happen. According to the Social Security Administration, around 77% will be payable if the trust fund depletes. 

As we said earlier, Congress will probably roll out changes to Social Security to address the issue of solvency. There’s a hot debate right now about possible steps Congress may take. 

For instance, they may reduce benefits, raise taxes on benefits, increase penalties for claiming benefits before reaching full retirement age, or even delay the full retirement age if the problem goes out of control. 

Additionally, some have suggested the current wage cap on payroll taxes (set at $160k) could potentially be raised. At the moment, any income exceeding the limit is exempt from taxes. Naturally, this means low and middle-income earners take on a higher burden of funding Social Security than approximately 6% of those above the $160k amount. 

The last proposed solution might be the most fair as it will help preserve the benefits for retirees and disabled individuals, while also alleviating the burden of regular US citizens.

Prepare for the worst

Despite the severity of the issue, the US government does take care of the retired population and those receiving disability benefits. All the possible methods of alleviating the problem will most likely help offset the shortfall. 

Hopefully, Congress will choose to prioritize low and middle-income earners and preserve as many benefits for those who need them the most. 

Still, it doesn’t hurt to be prepared for a decrease in benefits. You can invest and save for retirement using other channels, especially if you’re far from retirement age. After all, it doesn’t hurt to prepare for the worst-case scenario.

Note: 

The information in this blog post is for reference only and not legal advice. As such, you should not make legal decisions based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.