It is not a major issue in this fall’s presidential election , but it should be.
In less than 10 years, by 2033, the Social Security system will go bankrupt — or, to be more precise, the balance in the trust fund the federal government uses to pay Social Security benefits will reach zero.
What happens then? Well, actually, nobody really knows. But it has happened before. And by looking at what happened last time, we can learn about what could happen.
The Social Security Act was signed by President Franklin D. Roosevelt in 1935, with the first payroll taxes collected in 1937 and the first benefits paid out in 1940. By design, the Social Security system collected more in taxes than it paid in benefits, but it wasn’t until 1939 that Congress created the Old Age and Survivors Insurance Trust Fund to manage the excess funds.
By law, all assets in the trust fund must be invested in nonmarketable special-issue obligations of the U.S. Treasury. These special bonds are backed by the full faith and credit of the United States and pay interest to the trust fund. These bonds are actually printed out by the government and stored in filing cabinets in an office in Parkersburg, West Virginia.
Despite the fact that there are almost $3 trillion in bonds stored in filing cabinets in West Virginia, these assets are not well guarded. There is no Army base nearby dedicated to their protection. This is not Fort Knox. That is because the bonds themselves are functionally worthless. There is no market for them. If you stole them, no one would buy them. They are not real assets. They are just pieces of paper. They are an accounting fiction.
Essentially, from Social Security’s founding until 2010, the rest of the federal government has been borrowing money from the Social Security system, with interest. But starting in 2010, Social Security began to pay out more in benefits than it took in taxes.
For over 10 years, the size of the trust fund grew, as the interest paid on past bonds to the trust fund was still larger than the deficit between taxes collected and benefits paid. But now, that is no longer the case, and the size of the trust fund is shrinking every year. The trust fund’s balance will hit zero sometime in 2033, according to the latest report by the trust fund’s actuary.
What then?
The good news is that even when the Social Security trust fund reaches zero, that doesn’t mean the Social Security system will be devoid of revenue. The IRS still collects payroll taxes every week. Those revenues can be used, indeed they are legally required to be used, to pay as many promised Social Security benefits as possible. Seventy-nine percent of all Social Security benefits could be paid using just payroll tax revenue, according to the Social Security trust fund actuary.
But that still leaves 21% of benefits unfunded. And at this point, whoever is in the White House in 2033 would face a tough dilemma.
The Social Security Act obligates the Social Security Administration to pay every legally qualified beneficiary full benefits. But the Antideficiency Act prohibits all government agencies from spending more money than they have. Furthermore, nothing in the Social Security Act says what the Social Security Administration should do if there is not enough money in the trust fund to pay for all benefits.
One solution would be to pay everybody 79% of what they are legally entitled to collect each month and then send them an IOU for the rest. Another option would be to pay everyone their full benefits but late. So, instead of getting a full check on the same day every month, beneficiaries would get a full check every five weeks. A third option could be capping the maximum benefit paid so that everyone would get paid their full amount on time, except for wealthier retirees who would still get a check, just a much smaller one.
As most people know, not everyone’s Social Security benefit is the same. The longer you worked and the more money you made, the larger your check each month. People can also boost their monthly benefits by retiring later. So, someone who worked for 35 years and made up to the taxable maximum, which is about $150,000 today, would get $2,710 a month if he or she retired at 62, $3,822 if he or she retired at 66, and $4,873 if he or she retired at 70. That’s almost $60,000 a year taxpayers are paying some retirees. Meanwhile, the average Social Security benefit is $1,916 or almost $23,000 a year.
None of these options are politically appealing, but they would all be legal. The Social Security Administration would have to do something to balance the conflicting legal requirements of the Social Security Act and the Antideficiency Act, but the Social Security Act gives the agency no guidance on how to do so.
Ideally, Congress would act well before the trust fund reached zero, but don’t hold your breath. For years before 1982, the Social Security actuary warned Congress that the trust fund was about to run out. It did nothing. Finally, at the last minute, Congress passed a law allowing the Old Age and Survivors Insurance Trust Fund to borrow from the Social Security Disability Insurance Trust Fund, which is a separate legal entity.
However, this only bought Congress a few months, and in that time, it passed the Social Security Amendments of 1983, which raised payroll taxes and reduced Social Security benefits. So, Congress did eventually fix the problem, but not until the trust fund hit zero and it was forced to borrow from another account. Judging by how much attention the problem is getting in this year’s presidential race, it appears Congress is going to wait until the last second again to do its job.
It is understandable why politicians from both parties want to close their eyes and pretend the Social Security trust fund problem doesn’t exist. Solving it requires tough choices. No one likes to raise taxes on their constituents or cut their benefits. An estimated 183 million people paid payroll taxes into the Social Security system last year, and 67 million people, including 53 million retired workers, 6 million survivors of deceased workers, and 9 million disabled workers, received benefits. That is a lot of voters who could be upset if their taxes were raised or their benefits cut.
But Republicans should look at the trust fund’s looming insolvency as an opportunity, specifically an opportunity to cut spending. For years, conservatives have tried to use the federal government’s borrowing limit as leverage to force Democrats to cut spending. It hasn’t worked. Democrats not only have called the Republicans’ bluff, but now they are using the debt limit as a weapon to raise spending even higher.
Since 2010, when the Social Security system began paying out more in benefits than it takes in taxes, the Treasury has had to borrow money from the public to make up the difference. That has increased our national debt each year. The trust fund’s running out doesn’t really change this fact. Congress could “solve” the problem by simply passing a law saying that the Social Security Administration can just spend all the money it is legally obligated to pay out in benefits and that the Treasury will just have to borrow more money to make up the rest. That is essentially what is happening now.
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But that would be a huge missed opportunity. There is no reason the federal government needs to give rich old people $60,000 a year. Not when young people who can’t afford a home are paying for those benefits through payroll taxes and higher interest rates, thanks to higher government debt.
Republicans owe it to young working families to reduce Social Security spending, especially spending that goes to already wealthy retirees. If they don’t, young people will not be able to buy homes, get married, and start having children. In which case, Social Security’s insolvency will only get worse.
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