Elected politicians are frequently heard, especially in May, when the Social Security Board of Trustees publishes its annual report on the finances of Social Security, make prophecies that Social Security is going “broke,” “going bankrupt,” or “going insolvent.”
So, is it even possible that Social Security would run out of money? The quick response is no; it is a pay-as-you-go system which implies that, unless the law is out of the question, money is always coming in. Nevertheless, due to an increasing number of retirees being supported by a declining number of workers paying into the system, it is plausible that the incoming money may not be enough to keep up with the full extent of benefits promised. Current projections place this within the realm of possibility by the year 2035.
This does not imply that all individuals enrolled in the program will completely cease receiving benefit payments overnight. Rather than that, the amount of those payments would be considerably lowered.
For those who need a more in-depth answer to this question, I will stress the fact that Social Security is basically financed by the payroll taxes taken from the salaries of working Americans, for as long as they work. The system works this way as it always manages to get some financial resources even if at times outlays exceeds all revenues. Take the previous year, for example, out of the total expenditure of Social Security in the amount of $1.39 trillion payments to beneficiaries covered $1.35 trillion from the payroll taxes.
Now, say hypothetically that Social Security surpasses the point where overall benefits paid out go over total revenues raised, the law provides for a benefit cut for all in a proportionate fashion to the amount that is generated through payroll taxes and benefits can be paid. In other words, should $100 million of benefits be guaranteed but only $75 million of payroll taxes gathered, all the benefits would be reduced equally by 25 percent.
Projections show that when the trust fund is exhausted in 2035, the payroll tax revenue will only be sufficient to cover 83 percent of benefit payments. Therefore, payments would require reduction each year since they grow faster than payroll tax revenue.
Clearly Americans taxed their incomes to fund the Social Security payments cannot be told by Congress that everything is okay and nothing will be done. Some revenue raising measures can be legislated, the amount of the payroll tax can be increased or benefits can be trimmed so as to keep the program above water.
Clearly there is a problem here that must be dealt with. This is a problem that Congress cannot avoid without putting beneficiaries at risk.
Understanding the problems and risks associated with the financing of this program is essential in view of the fact that over 65 million Americans receive social security’s benefits in the form of retirement income, survivor’s benefits, and disability payments.
