Trustees Warn: Social Security in Financial Trouble

Jun 22, 2016

Today, the Social Security trustees warn that Social Security faces major financial challenges. According to the trustees’ annual report, the system’s finances are facing growing pressure due to the aging of the population. As the large baby boom generation enters retirement and Americans continue to enjoy longer lifespans, more and more individuals will be collecting benefits from the system, while relatively fewer workers will be paying taxes to support it.

Since 2010, the Social Security program has been spending more than it has been taking in, and the trustees predict that these deficits will grow sharply in coming years. According to the report, the program’s trust funds will be exhausted in just 18 years, which will put millions of beneficiaries at risk of large benefit cuts.

Specifically, the trustees find that:

  • The combined Social Security trust funds are projected to be fully depleted by 2034 — just 18 years from now.
  • Without legislative action, all Social Security beneficiaries — 88 million in total — could face across-the-board benefit cuts of 21 percent in 2034.
  • The Social Security’s Disability Insurance Trust Fund is estimated to be depleted even sooner — in 2023.
  • Without legislative action, approximately 12 million disabled people and their families could face across-the-board benefit cuts of 11 percent that year.

Social Security is a critical part of retirement security for millions of Americans. Lawmakers should work together to address the imbalance facing the program to make the program sustainable for the long term. The good news is that many solutions exist — as the trustees emphasize in their report: "With informed discussion, creative thinking and timely legislative action, Social Security can continue to protect future generations."

What Is Social Security?

Social Security is the largest single federal program. It accounts for approximately one quarter of all federal spending. Almost every American worker pays a dedicated payroll tax that entitles them (as well as their spouses and survivors) to benefits when they retire or become disabled. The payroll taxes and other revenues are credited to two trust funds: the Old Age and Survivors Insurance Fund (OASI) and the Disability Insurance Fund (DI). OASI provides benefits for retired workers and their families, as well as survivors of deceased workers, and DI provides benefits for disabled workers and their families. Of the approximately 60 million people who currently receive Social Security benefits, approximately 82 percent receive payments through OASI and 18 percent receive DI benefits.

Demographic Trends Are Putting Financial Pressure on Social Security

The aging of the population creates serious financial challenges for Social Security. As baby boomers retire and life expectancy continues to increase, the number of Social Security beneficiaries is projected to climb sharply over the next several decades. By 2034, the total number of beneficiaries is projected to reach 88 million, nearly 45 percent more than the number in 2016. Over the same period, the ratio of workers paying taxes to support each Social Security beneficiary will decline from 3:1 to 2:1.

This very predictable, growing mismatch between the number of people paying into Social Security and the number receiving benefits will cause Social Security spending to increase significantly more than revenues. The trustees project that OASDI outlays will grow from 5.0 percent of GDP in 2016 to 6.0 percent by 2034 — a 20 percent increase. By contrast, the system’s revenues will remain relatively constant, increasing only slightly from 4.6 percent of GDP in 2016 to 4.8 percent of GDP in 2034.

The Trust Funds Will Be Exhausted in 18 Years

These budgetary imbalances will translate into growing annual cash deficits that will deplete the system’s trust funds.

In 2016, Social Security’s cash deficit (excluding interest) is projected to be $73 billion. Between now and 2034, the annual cash deficits are projected to add up to $2.8 trillion. During this period, the trust fund balances will be reduced. However, given that the trust funds only contain Treasury “IOUs,” the Treasury will have to borrow these funds from the public to cover beneficiary payments.

Absent legislative action, the trustees project that the trust funds will be fully exhausted in 2034. At that point, Social Security will no longer be able to pay full benefits, and 88 million beneficiaries could face a 21 percent cut in benefits. For a retiree with average pre-retirement earnings, that amount is approximately $5,360 annually in today’s dollars. A reduction in benefits of this magnitude would impose huge burdens on low-income seniors because Social Security is a major source of their income. Social Security provides more than 80 percent of the income of seniors in the bottom 40 percent of the income distribution (those with $23,592 or less in total income).

The Disability Trust Fund Will Be Depleted in 2023

The financial outlook of the Disability Insurance (DI) Trust Fund is even more troubling. Although legislation enacted at the end of 2015 kept the DI Trust Fund from being exhausted in 2016, the reform only delayed the date of exhaustion of the DI trust fund to 2023. And because the reform achieved that goal by simply transferring payroll tax revenues from the OASI program to the DI program, it worsened the condition of OASI and did nothing to improve the financial condition of the combined OASDI program.1

The trustees urge that "legislative action is needed soon to address the DI program’s financial imbalance." If no additional legislation is enacted before 2023, benefits for 12 million disabled Americans and their families could be cut by 11 percent, reducing the annual benefit for a recipient by approximately $1,825, on average. 


The good news is that many policy solutions are available to improve the financial outlook of Social Security. In 2015, the Congressional Budget Office published a report containing thirty options for improving the long-term stability of the program. Examples of reforms include: reducing annual cost of living adjustments, increasing payroll taxes, lifting the income cap on payroll taxes, reducing initial benefits, and raising the retirement age. The Bipartisan Policy Center also published a major report outlining options for strengthening both Social Security and overall retirement security.

Importantly, if policymakers act sooner rather than later, they will have more and better options, which can be gradually implemented to reduce the impact on current and future beneficiaries. Conversely, every year of delay and inaction limits options and makes reform more difficult, which will require larger benefit cuts, higher taxes, or both.

For their basic financial planning, the American people need to know well in advance what benefits they will receive in retirement. If benefit levels are to be cut, people should be given ample warning so they have time to adjust their saving and retirement plans. If taxes are to be raised, people also need to incorporate those changes into their planning.

The math is simple, and the consequences of inaction are clear. Policymakers should work together to stabilize and strengthen this important program for generations to come.

1The Bipartisan Budget Act of 2015 reallocated payroll tax revenues between the OASI program and the DI program. Although that reallocation delays the depletion of the DI trust fund, it speeds up the depletion of the OASI program. The net effect of the reallocation on the combined OASDI program is zero. The legislation also made other small changes to the Social Security program, including changes to eliminate fraud, waste, and abuse, however, these other changes did not meaningfully change the financial outlook of the Social Security program. (Back to citation)


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