Social Security Solvency

Social Security Solvency, in the context of Social Security, refers to the program’s ability to meet its financial obligations and pay out promised benefits to eligible beneficiaries. However, this does not mean legislators cannot modify the program by raising taxes or cutting benefits to make it more sustainable. It depends on the balance between the program’s income (such as payroll taxes, taxation of benefits, and interest on reserves) and its expenditures (the benefits paid out to retirees, disabled individuals, and survivors). When the income exceeds the expenditures, the Social Security system is solvent and can continue to provide benefits as intended. However, if expenditures exceed income, the program is considered insolvent, and the system’s long-term sustainability comes into question.

Current Status of Social Security Solvency

The Social Security trust funds that pay 66 million beneficiaries are expected to run out of reserves in 2034, a year earlier than projected last year. At that point, continuing taxes would cover only 76 percent of scheduled benefits. This deterioration results from population aging, lower birth rates, and higher inflation. Fortunately, Social Security can still be saved with modest adjustments to revenues and spending. But the longer lawmakers wait to make these changes, the larger they need to be. This is because the actuarial shortfall, which represents future revenue and outlays relative to the current payroll, will grow as a percentage of taxable payroll over time.

The trustees recommend that Congress act sooner rather than later to avoid large future tax increases and benefit cuts. A plan that raises or reduces payroll taxes or outlays by an equal amount of a percentage of taxable payroll in each of the next two decades is expected to eliminate the 75-year shortfall and leave Social Security on a sustainable fiscal path through 2096. The Trustees estimate that the program’s 75-year shortfall will rise to 3.6% of taxable payroll, compared to a previous projection of 2.5%.

Proposals

Some lawmakers have pushed proposals to address Social Security’s problems, including increasing the payroll tax rate and closing loopholes that allow wealthy Americans to avoid paying it. Others have advocated raising the retirement age, but it’s unclear how much this will help. Demagoguing efforts to save Social Security will only delay needed action, resulting in large and abrupt future tax hikes and benefit cuts. The Trustees‘ latest forecast shows that we cannot continue to delay action on Social Security.