Social Security Running Out of Money & Solutions

• Social Security is the single largest expenditure of the federal government: $2.01 trillion
• The 86-year-old program currently consumes 22.6% of the federal budget
• Inflation is driving up funding because of cost-of-living-adjustments (COLA)
• Social Security trustees project the program will be insolvent in 13 years

The contentious issue of Social Security burst into the spotlight after the State of the Union address when President Biden accused Republicans of wanting to pull the plug on the program. His partisanship may be a stumbling block for an overdue overhaul of the the 86-year old government benefit plan.

Social Security has a looming financial shortfall that threatens the program's solvency by 2035, according to Social Security's trustees. Even the prospect of an impending crisis is not likely to produce more than political lip service because no lawmaker wants to rile the 65.9 million beneficiaries. 

Nothing irritates seniors more than Washington crying wolf about Social Security running out of money or facing Draconian cuts.  You never hear lawmakers raising the alarm about the prospect that congressional pensions or welfare programs will have to be cut because of rising costs.  

Although Social Security has undergone a plethora of changes since its inception in 1937, little has been done to address the fundamental tenants of the program.  Inaction is unconscionable because Social Security consumes 22.6% of the federal government's annual budget and keeps sopping up more money.

In 2022, the federal government paid $2.01 trillion in Social Security benefits, primarily to retired workers and dependents.  The program also includes payments to survivors and disabled workers and their dependents.  It is the largest single item in the federal government's fiscal budget. 

In addition, this year's budget includes $13.3 billion in funding for administration of the program.  That represents a $785 million increase from the previous year.  The Social Security Administration employs about 64,000 workers. By comparison, the average Fortune 500 firm employs 60,629 workers.    

Since 1970 the number of beneficiaries has more than doubled and the program's costs have soared by 10,234% or more than 10 fold, The data for this and the other numbers cited above comes from the federal government and the Social Security Administration.  

Three Congressional acts are responsible for the ballooning costs, including: In 1950, lawmakers doubled the value of benefits; In 1975, Congress enacted legislation approving cost-of-living adjustments (COLA). In 1983, Congress approved borrowing from the program's trust funds.

The trust funds are under increasing  pressure now because of COLA, which usually runs 1.7% or less.  But during the hyper-inflation of the last two years annual increases were 5.9% in 2022 and 8.7% this year, the highest in 40 years.  The last time it was higher was in 1981when the increase was 11.2%.

Borrowing from Social Security began when it ran a surplus from 1984 through 2009. That money was borrowed and spent by the government to pay for other programs.  In exchange, the the Social Security trust funds were issued special Treasury bonds to redeem in the future.  

Since 2010, Social Security has been running an annual deficit, meaning it has been collecting less than it has paid out, according to the Urban-Brookings Tax Policy Center.  Social Security trust funds currently total $2.9 trillion, enough to cover about one year's worth of benefits.    

The trust funds collect money raised from a 6.2% Social Security tax on wages for employees and a matching amount (6.2%) is  paid by employers. Beneficiaries also pay taxes on their Social Security income. However, the total of all these taxes is insufficient to pay for current benefits. 

Fixing Social Security won't be easy because Congress has too long neglected the crisis, preferring to kick the proverbial can down the road.  Just raising the age for benefits is a band-aid solution. Here are some modest proposals to begin to realign Social Security to deal with the rising costs of the program

• Eliminate the wage base limit for the Social Security tax.Currently, no taxes are collected on income above $160,200. There's no wage base limit for the Medicare tax.
• Exclude COLA adjustments on Social Security benefits for single people making over $100,000 and couples earning more than $200,000.
• Reduce, but do not eliminate, benefits to the top 20% of earners receiving Social Security checks.

Changes also need to be made to the current CPI formula used to calculate the COLA adjustment.  The most controversial move would be to invest Social Security trust funds in equities and bonds to mimic other public pension plans. Currently, funds are invested in U.S. Treasuries, which historically have returned 1%.

Even these proposals may not be enough to insure Social Security's long term future. With more Baby Boomers retiring, the number of beneficiaries will continue to escalate through 2030.  At the same time, the ratio of the number of workers-to-beneficiaries is declining.

The Social Security trustees estimate the ratio of workers-to beneficiaries will drop from the current 2.8-to-every beneficiary to 2.1-to-one by 2035.  Unless the ratio improves, the program will be on life support, requiring steep tax hikes or harsh cuts in benefits. 

In light of these serious issues, the current Congress will be derelict if it does not begin taking steps to put Social Security on firm financial footing.  It will take more political courage than currently exists in Washington,  Therefore, lawmakers likely will do what they always do. Posture and little else.