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Social Security Funding

May 03, 2019

A report recently issued by the trustees of the nation’s Social Security system offers some dire predictions. The report estimates that Social Security benefits will exceed the income from Social Security taxes in 2020.

Fortunately, the Social Security system has reserves of nearly $3 trillion which can be used to make up for the shortfall between inflows and outflows. This should allow Social Security benefits to continue using the current formula for an additional 15 years until 2035. At that point it would take an act of Congress to appropriate additional funds in order to keep the Social Security system solvent and paying benefits on time.

Due to demographic changes in the United States it is expected that Social Security benefits will grow at a faster pace than the tax revenue that was intended to support it. It is estimated that Social Security benefits will increase from 4.9% of US economic output in 2019 to 5.9% by 2039.

Clearly this represents an unsustainable path for Social Security and will likely require some form of adjustment by 2035. This could come in the form of higher Social Security taxes, delayed retirement benefits for younger workers, or means-testing in which high income participants receive a reduced benefit.