When Will Social Security Run Out of Cash?
Social Security is by far the single-most important social program in the United States, where millions upon millions of citizens rely on the income to get by in retirement.
There have been countless gloom and doom reports on Social Security becoming insolvent in the next two decades due to changing demographics and made worse by a Congress unwilling to act.
According to a recent survey by the Pew Research Center found in 2014 found that 51 percent of millennials don’t expect the program to be there by the time they retire.
And yet another recent article by USA Today points out that while Social Security has problems, running out of cash isn’t one of them.
As the story notes, the worker-to-beneficiary ratio is expected to decline until 2035 as baby boomers leave the work force, and there aren’t enough workers to step in. Retirees also are living substantially longer as life expectancy has gone up nine years since 1960.
Income inequality is another factor hurting Social Security, with a greater percentage of earned income being exempted from Social Security’s payroll tax while also seeing those who are better off living significantly longer than low-income earners.
Per USA Today:
But the biggest concern of all is the inflection point the program has hit. According to the newest annual Trustees report, Social Security will expend more than it collects in revenue this year for the first time since 1982. Though the amount of estimated net cash outflow ($1.7 billion) is relatively small next to the $2.89 trillion currently held in asset reserves, this outflow is expected to increase rapidly beginning in 2020 and beyond.
Where the misconception that Social Security is running out of cash comes into play is based on the Trustees’ latest prediction that the program’s asset reserves will be exhausted by 2034. Should this excess cash run out as forecast, an across-the-board cut to benefits of up to 21% may be needed to sustain payouts through 2092, without the need for any further cuts.
So, yes, Social Security’s excess cash will likely be depleted in less than two decades, but as long as the government keeps taking money out of everyone’s paycheck for Social Security, the program will never run out of money.
Social Security currently has three income streams, though assuming Congress fails to act and the Trust’s asset reserves are depleted, then the interest income earned on its excess cash will go away.
But that still leaves two streams of revenue for the program:
The first is Social Security’s payroll tax, a 12.4% tax on earned income between $0.01 and $128,400, as of 2018. As long as Americans keep working and Congress doesn’t remove the payroll tax as a source of revenue, the payroll tax will remain the program’s heavy hitter, so to speak. In 2017, the payroll tax generated $873.6 billion of the $996.6 billion collected.
The second recurring source of revenue is the taxation of benefits. Signed into law in 1983 and implemented in 1984, the taxation of benefits allows recipients earning above certain thresholds – adjusted gross income plus one-half benefits above $25,000 for individuals and $32,000 for couples filing jointly – to have a portion of their Social Security benefits taxed at federal ordinary income-tax rates. In 2017, the taxation of benefits led to $37.9 billion being collected.
As long as those two streams remain intact, the program will never run out of money. Of course, the amount of distributions will likely go down, but that doesn’t mean Social Security will ever go bankrupt.