Are we on track for a future without Social Security?
The latest reports by the U.S. Treasury project that the Social Security fund will run out of money in just 12 years
Social Security brings many different things to mind: a 6.2% tax on every paycheck, the money you get after you retire, that nine digit number that you keep so secret. But never has it crossed my mind that Social Security would run out of money. Last week, the Treasury reported that the Social Security Trust Fund will run out of money in 12 years, one year earlier than previously predicted.
Frankly, Social Security is taken for granted by most people, and receiving the monthly payments is a crucial part in many people’s retirement plans. This week, let’s look at how Social Security works and how we got to where we are now.
How does Social Security Work?
The Social Security program was introduced in the Social Security Act of 1935, with the main goal of providing financial benefits to retirees. To fund the program, workers pay into a pool with taxes on their income. Those eligible for Social Security payments receive them from this pool. As long as the number of new workers entering the workforce is greater or equal to the number of people leaving, which has been true historically, then the program should be able to sustain itself. Additionally, the money not used for payments is invested into government bonds, which is what has helped the fund grow (slowly) to nearly $3 trillion dollars.
Why will Social Security run out of money?
To clarify, when we talk about the money “running out,” we are saying that there is basically no more extra money in the pool, no more “extra” money to be invested; all of the money coming in will be going out starting in 2033. So technically, Social Security payments won’t be ending, they just won’t be able to continue to be as much as they currently are; projections have the future payments being at about 80% of what they are now.
To get back to “why?”: birth rates have been declining steadily, hitting a record low last year. This, coupled with increasing life expectancy, means much more money is coming out of Social Security than is going in, and it will likely continue to be this way moving forward. By the Treasury’s estimates, the number of Americans receiving Social Security payments will increase to more than 79 million by 2035, up from the current 54 million, according to Census data. Meanwhile, the number of births in the U.S. declined last year by 4% from 2019, double the average annual rate of decline of 2% since 2014.
Prepare for the worst?
In terms of what to do about Social Security running out, there isn’t really anything we can do. Every administration since Reagan has promised/attempted Social Security reform, yet the future of the program is still bleak. Proposed solutions are also bound to disapprove certain groups, since I’ve only read about proposals to increase taxes or decrease the payments.
There’s also the possibility of investing Social Security’s funds in something other than low return government bonds. I mentioned that the growth has been slow, but how slow? 2.2% a year. To compare, inflation is just under 2%, so we’re barely beating inflation. Norway’s government pension fund (which is basically what Social Security is) has grown almost 10% so far this year. Had Social Security been set up to invest in even just a mildly aggressive portfolio instead of government bonds, we would not be in this situation.
Ultimately, it’s up to Congress to act and do something, and, honestly, with the government being slow to act on the end to the eviction moratorium earlier this summer, it’s hard to believe that something ten years in the future will be high up on the priority list as well. We may all want to stop including Social Security payments in our retirement planning.
Thank you Austin for the informative read. I learned that Social Security gains a net 2.2% from its investing into low return government bonds.😃