The looming Social Security cliff

Social Security benefits will shrink beginning in 2032 unless Congress changes the law because, at that point, the Social Security trust fund will run dry.To address this problem, Congress may raise taxes, change the formula that determines benefits, or simply add to the federal deficit and national debt.This Social Security cliff is a flashpoint in the clash of generations bubbling up in policy circles. Given the emotions and the stakes, it’s no surprise that some errors, confusion, and misinformation have crept in. Some blame Congress for “raiding” the Social Security trust fund. Others believe that there never was a trust fund. Many near-retirees believe that they have “paid in” to Social Security and that their past tax payments are (or should be) waiting for them at retirement. All of these claims have grains of truth, but all are fundamentally wrong.There are three roots of Social Security’s fiscal problem: The basic design of the Social Security program (in which today’s workers pay the benefits of today’s retirees), the over-generous inflation formula it has used for the past few decades, and the decades of low birthrates, particularly since the advent of the sexual revolution and the birth control pill.To have a healthy debate on how to fix Social Security, and which tradeoffs to make, we need to better understand the program. Congress and President Franklin Delano Roosevelt created Social Security in 1935 as a solution to poverty among elderly citizens, the number of whom was rising thanks to industrialization.The basic system is still in effect today.First, the federal government takes a chunk out of every worker’s paycheck. Half of that cut is visible to the worker, as a 6.2% Federal Insurance Contributions Act tax. The other half of the cut is invisible to the worker, an equal amount paid by the employer.That money is collected from basically all workers in the U.S., including many who will never collect a dime in benefits, such as foreign guest workers. The tax dollars go into the Social Security trust funds, of which there are two funds — one which covers retirement and the other that funds disability payments.FILE – A Social Security card is displayed Oct. 12, 2021, in Tigard, Ore. (AP Photo/Jenny Kane, File) Here’s one thing many don’t understand: The Social Security trust fund is not mostly a savings vehicle, and the money today’s workers pay in is not earmarked for them. The money paid into the trust fund today goes out to current retirees at the beginning of next month.Not every retiree gets the same retirement benefit. The formula calculating benefits is complex, but in general, those who worked more and paid more in Social Security taxes get higher benefits in retirement.Beneficiaries can claim Social Security starting at age 62, the “early retirement age,” but the monthly benefit will be reduced compared those who retire at age 67, the “full retirement age.”The medium earner received about $29,800 in benefits, according to Social Security Administration data. Higher earners bring in more, and lower earners bring in less.Your Social Security statement estimates your benefits based on this formula, but that depends on the Social Security trust fund having enough money to pay everyone their promised benefits. Under current law, Uncle Sam cannot borrow to pay Social Security benefits, nor shift money from general funds to do so. It can only pay out from current revenues (what today’s workers paid in FICA last month), and any accumulated surplus.It’s the trust fund surplus that is running out in 2032, which will require reduced benefits unless the law changes.Nobody raided the trust fund One of the most common false assumptions about Social Security is that Congress “raided” the trust fund, or spent past surpluses on things other than Social Security. That is simply false.Here’s a brief fiscal history of the Social Security trust funds:For most of Social Security’s history, FICA tax exceeded Social Security benefits. As a result, the trust fund slowly built up surplus reserves. For instance, from 1983 (after the two Reagan reforms improved the fiscal balance of Social Security) to 2010 (when the financial crisis hit just as the bulk of baby boomers hit retirement age), Social Security ran a surplus each year.In 2010, the reserves in the Trust Fund hit $2.6 trillion. Those reserves were, by law, invested in U.S. Treasury bonds (that is, lent to the U.S. government), and the interest paid by these bonds provided a second source of income for the trust fund.Thanks to interest payments from U.S. taxpayers, the trust fund actually grew for another decade, even as benefits exceeded tax revenue. The fund didn’t start shrinking until 2021, and it still stands close to its historic highs, at $2.56 trillion.The problem is that the shortfall is getting greater every year (the annual Social Security deficit increased from $67 billion in 2024 to $160 billion in 2025). By 2033, that $2.56 trillion in reserves will go down to zero because for the next seven years (as for the last five years), the benefits paid out will exceed the fund’s income.The fund’s solvency has nothing to do with Congress’s overspending. The reserves were never drawn down by other spending or borrowing.Those Social Security reserves have been lent to other parts of the federal government because that is what the law required. By definition, investing in Treasury Bonds means loaning money to the general fund. Money borrowed by the U.S. government will always be spent by the federal government, either on federal spending or on paying down the portion of the national debt held by the public — there is nothing else that can be done with it.So if the Social Security Trust Fund wasn’t raided, why did it go from a massive surplus to insolvent?Social Security and the birth rate Demographics are the culprit.From 1975 to 2005, there were about five working-age Americans (ages 20 to 64) for every person 65 and over. Since then, the ratio has gotten worse every year, and now there are only three working-age adults for each retirement-age person.Also, Americans live much longer than we used to, meaning seniors spend more time collecting Social Security benefits. In 1935, the average American at age 65 could expect to live another 12 years. Today, that number is 20 years.Longer life spans aren’t a bad thing, but having fewer workers is. The main reason we have fewer workers is that for decades, we have had fewer babies. In the 1950s, American women had an average of 3.5 children. With the advent of the birth control pill and the sexual revolution in the 1960s, the birth rate plummeted and has been below 2.0 for most of the past 50 years.If our birth rate had been 3.0 babies per woman (still 14% lower than the peak of the Baby Boom), our working-age population would be about 40% higher today, and Social Security would not be facing insolvency.Generous benefits One problem with Social Security is that the benefits are so generous.The maximum monthly Social Security benefit is more than $5,000 per month. A couple, both earning, would be pulling in $120,000 a year in benefits. And such a couple would, by definition, have been high earners for decades, meaning they had the opportunity to build up massive 401(k)s and IRAs.So for many, Social Security is a very generous subsidy to already wealthy retirees.Also, the inflation measure used to adjust Social Security benefits every year is one of the more generous measures, which many experts say overstates actual increases in the cost of living. In 1972, Congress passed a law setting the official growth rate of Social Security as the Consumer Price Index for Urban Wage Earners, abbreviated CPI-W.The end result: Every year, Social Security benefits get a bit more generous.Here’s another way to look at the generosity of the benefits: A medium-wage worker who retires at 67 and takes Social Security for the average 18 to 20 years will get more money in benefits than he paid in, even adjusting for inflation.What happens now? So what happens in 2032?Retirees already receiving benefits will see their monthly checks get smaller. Current workers will see their promised benefits shrink.With no reserves left in the Social Security trust fund, it will only be able to pay out each month what it brings in. For the time being, that would mean a 22% cut in benefits.As Washington Examiner‘s commentary editor Conn Carroll explained in a 2024 op-ed, the president in 2032 will have a few options as to how to make that cut.SOCIAL SECURITY GETS 3.6% COST-OF-LIVING ADJUSTMENT FOR 2026But Congress could always pass a law to prevent or limit any benefit cut. Congress could shrink the shortfall by increasing Social Security taxes, transferring in general revenue, or just borrowing.What is certain is that Social Security, as it currently stands, is unsustainable.