When Will Social Security Run Out of Money?

Social Security is a central pillar in the retirement plan of millions of Americans. But in 1982 and again in 2020, to pay retirees the benefits they are due, the program must draw down on its assets. Unless Washington politicians agree to a solution, the Social Security trust funds may be depleted in as few as 15 years. If that occurs, all retiree benefit checks could be cut by 20 percent.

The Social Security program is a pay-as-you-go-system. It’s funded by the Federal Insurance Contributions Act (FICA) and the Self-Employed Contributions Act (SECA) payroll taxes. The program’s strategy is that worker contributions fund the benefits of retirees

In 1982, Social Security faced a funding crisis, but a bipartisan effort was successful in keeping retiree benefits whole. Since that time, the Social Security Administration has collected more money than it paid out in retirement benefits. By 2019, the payroll tax revenue had exceeded the benefits paid by $2.9 trillion. A common assumption has been that the entitlement is so critical to senior citizens that politicians won’t touch it.

Social security currently suffers a cash problem – namely, more money goes out than comes in. In the intervening years between 1982 to 2020, Social Security assets have been shrinking, a fact that negatively affects the program’s cash flow.

By the year 2030, all baby boomers will be 65 or older according to the U. S. Census. The problem is that an insufficient number of younger people are entering the work force to pay Social Security taxes and support those who have retired.

What’s more, life expectancy is increasing. Social Security estimates that by 2035, more than 78 million seniors will be 65 or older versus the 50 million in September 2020. So, as time goes by, the Social Security trust fund will be much less well-funded than it is today.

Under the current law, the main trust fund is likely to be depleted in 2034 and cuts in old-age benefits will be required. If Congress authorizes payment of old-age benefits through the Disability Insurance Trust Fund, then cuts in benefits will begin in 2035.

If the cuts in Social Security benefits occur, some of the relatively affluent who plan on relying on Social Security as an income source during retirement may be concerned. But according to John B. Shoven, a Stanford economist who’s also affiliated with the Hoover Institution and the National Bureau of Economic Research, the planned cuts could devastate a lot of lower-income people.

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Effect of Social Security benefits cut: Social Security benefits are progressive, meaning that the system provides greater assistance for those with greater need. For instance, an employee whose average career earnings are $22,215 until 2036 is entitled to receive about 52 percent of that income, or $11,517. If the mandatory cuts are made in 2037, this person would receive only about 32 percent, which equates to about a 20 percent reduction in benefits. Consequently, though all recipients would be negatively affected by the change, the Social Security recipients with the lowest income levels will be most affected by the cuts.

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The average 20 percent initial reduction may be the first of a series of benefits cuts if current laws remain intact and economic projections go unchanged. The next cut might be an additional 5 percent, for a 25 percent total cut.

Unless Congress and the White House agree to a solution before the trust funds are emptied, future retirees will face difficult choices: working longer and delaying retirement, or surviving on fewer benefits.