The State of the Social Security Trust Fund

The State of the Social Security Trust Fund

May 13, 2024

The State of the Social Security Trust Fund

The state of the Social Security Trust Fund in the United States is precarious.

Talking about Government programs and the status of their funding isn’t the most exciting topic. But the state of the Social Security Trust Fund is important and will get increasing coverage as we enter the second half of this decade. It may be the single biggest domestic issue to navigate for whoever is President in 2028.

According to the May 2024 Annual Social Security Report published by the Social Security and Medicare Boards of Trustees, the primary Social Security Trust Fund reserves are expected to be depleted in 2033.

As the Trustees put it: “As in prior years, we found that the Social Security and Medicare programs both continue to face significant financing issues.”

Social Security is an expansive and complex topic so this blog is not meant to be a an all-encompassing essay, nor will it be a history of the program. Rather, we want to lay out the basics of Social Security’s mechanics and the financial health of the Fund that supports it.

First, we will review how the Social Security Trust Fund works and how taxes and benefits are administered.

Then we will explain the current and projected funding status of the Trust Fund.

Finally, we will review some proposals and ideas for how to rectify its issues.


What is the Social Security Trust Fund and What Does It Do?

The Social Security Trust Fund

The Social Security Trust Fund is comprised of accounts held at the US Treasury. Social Security taxes are paid by workers and then monthly benefits are paid from the accounts to an individual when he or she elects to start receiving benefits or becomes disabled.

To the extent that there are more taxes received than benefits to pay, the excess funds are entirely invested in “special-issue” US Treasury securities. As of March 2024, the Fund held about $2.8 trillion of Treasury securities.

There are two distinct Trust Funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. They are often referred to collectively as just the Social Security Trust Fund but they are legally distinct.

  • The Old-Age and Survivors Insurance (OASI) Trust Fund pays monthly benefits to retired workers and survivors of deceased workers.
  • The Disability Insurance (DI) Trust Fund pays monthly benefits to disabled workers .


Social Security Taxes

The Social Security Fund receives income through payroll taxes.

Employers and employees each pay 6.2% of wages up to a maximum salary ($168,600 in 2024) and self-employed individuals pay 12.4% of earnings into the Social Security Trust Funds.

https://www.ssa.gov/oact/trsum/

Social Security Benefits

As of March 2024, about 72 million people received benefits from Social Security Administration programs.

The monthly amount an individual receives through Social Security is calculated through a somewhat complicated formula but it is generally based on:

  • Your birthyear.
  • The income you’ve earned in your career.
  • The age you decide to start receiving benefits.
  • A Cost of Living Adjustment (COLA).
    • In 2024, the COLA was 3.2%. In 2023, the COLA was 8.70%. - the highest COLA since 1982 due to higher than usual inflation in 2022.
  • Medicare Participation
    • If you are taking Social Security benefits, your Medicare Part B premiums are deducted from your monthly payments


Current & Projected Funding Status of the Social Security Trust Fund

Since 2010, cash flow in the Social Security Fund has been negative (benefits paid exceeded taxes received). At that time, the Social Security Administration was able to tap into the interest from the US Treasury securities held in the Fund to pay benefits.

Starting in 2021 however, the Social Security Administration had to begin drawing from Trust Fund reserves to make payments but this pool of cash can run out. When that happens, any opportunity to earn interest on excess reserves in the Trust Fund is lost.

https://www.ssa.gov/oact/trsum/


According to the May 2024 Annual Social Security Report published by the Social Security and Medicare Boards of Trustees, the Social Security OASI Trust Fund reserves are expected to be depleted in 2033.

After that point, they estimate that the program’s income will be able to cover 79% of scheduled benefits.



The primary causes are that the Baby Boomer generation (those born between 1946 and 1964) has begun to retire and the fact that people are living longer so they are receiving Social Security benefits for a longer period of time.

When the Social Security program began in 1935, the average life expectancy was about 60 and today it is closer to 80. As a result, there are fewer workers paying taxes into the program at the same time that more people are drawing benefits.


https://siepr.stanford.edu/publications/policy-brief/strengthening-social-security-safety-net


The good news: In the short term, payroll taxes from current workers will continue to pay for the bulk of benefits. The trust fund reserves will make up the difference between income and costs until the reserves are depleted so there is not an immediate cause for alarm.

Additionally, even if the shortfall is not addressed Social Security payments would not stop completely. Instead, Social Security would still be able to fund 79% of the promised benefits. Even then, it seems unlikely that the Government would allow anyone who currently, or will soon, receive Social Security to be affected.


Potential Solutions

There are a few solutions that have been put forward to address the Social Security Trust Fund shortfall:

1) Increase the Fund’s income through higher taxes,

2) Increase the Fund’s income through more aggressive investments in the Trust Fund, and/or

3) Reduce benefits.

An income increase could come from:

  • Raising the payroll tax rate itself
  • Increasing (or eliminating) the cap on wages that are subject to payroll taxes
  • Increasing the Fund’s returns by investing in riskier investments in addition to Treasury securities

A benefits reduction could come from:

  • Increasing the eligibility age
  • Reducing benefits for individuals with higher lifetime earnings by providing level benefits for all individuals

Ultimately, the solutions to address the Fund’s shortfall will need to come from Congress and the US political leadership. Social Security (and entitlements more broadly) has been a hot-potato political issue for years, but what are they saying now?

President Biden has not been willing to confront the issue and has spoken about expanding Social Security benefits, although he held the opposite position years ago. Similarly, former President and current candidate Donald Trump warned his party about touching Social Security and Medicare.

We will have to wait and see if lawmakers are proactive in addressing the Fund’s realities.


Conclusion


We will conclude by quoting the entire conclusion of the 2024 Trustees Report:

“The 2024 Trustees Reports indicate a need for substantial changes to address Social Security’s and Medicare’s financial challenges.

The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust their expectations and behavior. Implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits.

With informed discussion, creative thinking, and timely legislative action, Social Security and Medicare can continue to protect future generations.”

Additional Sources:

2024 Report: https://www.ssa.gov/oact/trsum/

https://www.ssa.gov/oact/progdata/fundFAQ.html

https://www.cbpp.org/research/policy-basics-understanding-the-social-security-trust-funds

https://www.ssa.gov/cgi-bin/investheld.cgi

https://www.ssa.gov/news/press/factsheets/WhatAreTheTrust.htm#:~:text=Social%20Security%20taxes%20and%20other,benefits%20and%20program%20administrative%20costs

https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2023/fast_facts23.html#page5

https://www.ssa.gov/news/press/factsheets/HowAreSocialSecurity.htm

https://www.ssa.gov/policy/docs/statcomps/oasdi_zip/

https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2023/fast_facts23.html#pagei

https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2023/fast_facts23.pdf

https://www.ssa.gov/oact/progdata/describeoasi.html

https://www.ssa.gov/oact/progdata/describedi.html#:~:text=The%20trust%20fund%20provides%20automatic,the%20Congress%20to%20pay%20benefits.

https://www.ssa.gov/pubs/EN-05-10035.pdf

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 Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice. For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications. As required by the US Treasury Regulations, you should be aware that this presentation is not intended to be used and it cannot be used for the purposes of avoiding penalties under federal tax laws.

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