Social Security Funds Are Running Dry. Don’t Panic.

Social Security’s finances are in dire straits.

An aging population is pushing up the cost of the program as a smaller share of Americans directly pay into it. That imbalance means that Social Security could become unable to provide full retirement and disability benefits to Americans in 2035, the program’s trustees warned on Monday.

At that point, without congressional action, elderly and disabled Americans who rely on Social Security could see their payments cut by 17%. Congress could avoid the crisis by raising payroll taxes, trimming benefits or some combination of the two. Those options carry extreme political risks, though, and policymakers have put off embracing an overhaul of the program.

But they may not have to. The U.S. government will still likely be able to afford to pay full benefits to retired and disabled Americans in 2035. Whether it does so will in some ways be an accounting decision for lawmakers who control how money is classified within the government—and whether they want to tackle tough questions about federal spending or sidestep the politically radioactive debate.

Right now, two Social Security trust funds—one for the disability-insurance program and another for the much larger old-age program, though they are often combined in forecasts—help make up the difference between program benefits and income. Since 2021, paying Social Security benefits has cost more than the program brings in from payroll taxes and other sources, putting the combined trust funds on track to depletion in 2035.

To some experts, the end of the trust funds wouldn’t require a substantive change to how Social Security is financed. Congress will have a straightforward option to keep delivering full benefits, they say, though the absence of cost savings or new revenue would mean leaving a significant driver of the overall federal deficit unaddressed.

“Having a trust fund does not make it easier for us to pay benefits. It commits the government to pay benefits, but it doesn’t make it easier,” said Andrew Biggs, a senior fellow at the American Enterprise Institute. “This is not gold sitting in Fort Knox in any way at all.”

What are the trust funds and how do they work?

For decades after Congress overhauled the program in 1983, Social Security took in more money than it spent on benefits. The excess accumulated in the trust funds.

But money sent to the trust funds didn’t sit there. Instead, Social Security technically lent it back to the rest of the U.S. government, which then used it for anything from funding military operations to paying back bondholders.

In return for the cash, the government gave the trust fund special IOUs—Treasury bonds that can’t be traded but are secured by the full faith and credit of the U.S. Those bonds generate interest, supplementing the income Social Security now nets from a 12.4% payroll tax, usually split between employers and employees, on up to $168,600 of income.

To many economists, one part of the U.S. government lending to another part of the U.S. government is anomalous. Many of them disregard intragovernmental debt like the Social Security trust funds when they consider the overall U.S. debt burden. Overall U.S. debt is roughly $34.6 trillion, while debt held by the public, the metric favored by economists, is $27.5 trillion.

What happens when money is taken out of the trust fund?

In the past few years, as the cost of Social Security has outpaced its income, the program has had to rely on the trust fund to pay its bills. To do that, Social Security redeems some of its bonds to get cash from the Treasury. In 2023, the balance of the Social Security trust funds declined by roughly $41 billion.

The Treasury pays the bill for Social Security the same way it pays all sorts of other bills: by using non-payroll tax revenue and money borrowed from investors on Wall Street. While that effectively means that Social Security benefits are now financed by overall revenue, experts in the program emphasize that the legal obligation created by the bonds is important.

“That’s possible only to the extent that Social Security was running on a surplus sometime in the past, which was reducing pressure on general revenues,” said Paul N. Van de Water, a senior fellow at the Center on Budget and Policy Priorities. “That’s an important political and legal distinction even if it’s not so important from an economic point of view.”

The perception that Social Security is safe from political meddling also helps Americans feel confident in the program. Ahead of the depletion of the trust fund, Congress would have to pass a law to allow Social Security to pull from general, non-payroll-tax revenues without a bond from the trust fund to redeem. Passing a law through Congress is no small thing, but compared with the much thornier debates around changing the popular entitlement program, simply preserving full benefits could be the easy way out for lawmakers.

The move could also mean the U.S. deficit continues to grow at a pace economists find alarming, potentially weighing on the performance of the economy.

Budget forecasters such as the Congressional Budget Office generally assume that Social Security will keep paying full benefits to Americans even after the projected depletion of the trust fund. That is an exception to CBO’s general practice of assuming that only current law continues into the future.

So, is a Social Security overhaul necessary?

Because Congress could choose to deliver full benefits even after the depletion of the trust funds, some policymakers see the need to more broadly overhaul Social Security as less urgent.

The Biden administration hasn’t proposed specific ways to extend the solvency of the program, even though President Biden had a Social Security plan during the 2020 campaign that called for collecting payroll taxes on income above $400,000, among other steps. Some Biden administration officials have in the past wanted to avoid putting out a plan to save Social Security that in turn suggests that the depletion of the trust fund could actually endanger the delivery of benefits, according to people familiar with their thinking.

“I am committed to extending Social Security solvency by asking the highest-income Americans to pay their fair share without cutting benefits or privatizing Social Security,” the president said in a statement on Monday.

The presumptive Republican presidential nominee, Donald Trump, has said he would look for spending cuts in government programs but won’t touch Social Security.

Social Security is helping fuel the government’s overall spending challenges. Spending on Social Security represented 5% of U.S. gross domestic product this past year, and it is expected to reach 5.9% of GDP in 2034, according to the Congressional Budget Office. Putting the U.S. on a more sustainable fiscal trajectory will likely require addressing Social Security, economists said.

“The system is adding to federal borrowing. Getting rid of the trust fund and simply calling it a day would be perceived as Congress giving up on doing anything about the fiscal trajectory,” said Wendy Edelberg, a senior fellow at the Brookings Institution and a former chief economist at CBO. “I don’t put it past them. These are more political questions than economic ones.”

Write to Andrew Duehren at [email protected]