‘Will Social Security run out?’ is the wrong question, economist says

Social Security, the federal social insurance program that millions of Americans rely on to generate income, is facing a shortage of funding it relies on from trust funds.

However, this does not mean that the program will go bankrupt or be unable to pay benefits in full.

Stephen Nuñez, director of stratification economics at the Roosevelt Institute, writes: “Bankruptcy or collapse is not in the cards.” new research “‘Will SSI end?’ It’s the wrong question.”

Polls show many Americans are worried about the future of Social Security, and experts say that could influence their decision to claim benefits, one of the most important financial decisions in retirement. Concerns about the future of the program may prompt people to seek benefits sooner; This reduces their monthly check and can therefore weaken their income. retirement security.

By 2025, nearly three-quarters (74%) of Americans said they are worried Social Security will run out in their lifetime. Nationwide Finance Survey conducted with the participation of 1,812 adults.

Another 2025 survey Cato Institute The survey found that 30% of respondents do not believe Social Security will be with them when they retire, while 70% expect benefits to face cuts in the future. The libertarian think tank surveyed 2,000 Americans ages 18 and older.

Nuñez told CNBC.com that Americans might assume Social Security would somehow be there for them.

“The word ‘bankruptcy’ used in the program does not accurately describe what is happening,” he said.

Other retirement experts have similarly argued that the term “bankruptcy” does not accurately describe Social Security’s funding shortage.

“Even if nothing is done, people will continue to receive the bulk of the benefits,” says Alicia Munnell, senior advisor at the Center for Retirement Research at Boston College. wrote in May.

In particular, the funds allocated to retirement rights may be exhausted By late 2032According to the latest estimates from the Social Security Administration’s chief actuary. If Congress doesn’t act, beneficiaries could face an estimated 24% cut in aid.

Notably, benefits will still be payable because the program will have revenue from payroll taxes.

If the program reaches that exhaustion date without congressional action to reform the program, there could be a variety of ways benefits could be affected, depending on interpretation of the law, Nuñez said. Possibilities include cuts to overall benefits, prioritizing payments to the most vulnerable beneficiaries, or phasing out full benefit payments on a delayed schedule.

Social Security has been in this situation before. In 1982, the pension fund balance fell to zero, prompting the government to take action. allow loans temporarily from disability and Medicare trust funds.

In 1983, Congress passed a law that included changes to shore up Social Security’s funding, such as raising the retirement age and imposing a federal income tax on benefits.

This reform package was planned to support the program for 75 years.

But the projected shortage is coming much sooner.

Nuñez said there were many things lawmakers did right at the time; for example, anticipating that the large size of the baby boomer population will eventually claim benefits, as well as demographic changes such as declining fertility rates and increased life expectancy.

If the trust funds had matured as projected, the exhaustion date would have been around 2063 instead of roughly 2034, the date Social Security trustees had set for the combined funds in their accounts. 2025 report.

Income inequality affected how much the program received from the FICA payroll tax, which is applied to earnings up to a certain cap that is adjusted each year. In 2026, this limit is $184,500. Earnings up to this amount are subject to a 6.2% payroll tax paid by workers and another 6.2% payroll tax paid by employers.

In 1983, 90% of earnings were below the Social Security FICA payroll tax limit.

But predictions that the percentage rate would remain about the same as future average annual earnings growth turned out to be incorrect.

Average real earnings increased as expected. But those gains were “unexpectedly uneven,” Nuñez said.

The top 6 percent of earners continued to earn wages above the payroll tax cap. But real earnings exceeded expectations, rising by an average of 62% from 1983 to 2000. Meanwhile, the remaining 94% of workers saw only a 17% increase in average real earnings.

The FICA payroll tax cap did not increase quickly enough to maintain 90% tax coverage. According to Nuñez, by 2000 it had fallen to about 82.5% and mostly stabilized there; This meant less tax revenue for the program’s reserves. in 2023 83% of total salary The Bipartisan Policy Center’s analysis shows it is subject to Social Security taxes.

The unexpected economic shock of the Great Recession also damaged Social Security’s finances; because higher unemployment and slower earnings growth meant less payroll tax revenue coming into the program. Older workers may have opted for retirement, which may have increased the benefits provided by the program.

Maya MacGuineas, chair of the Committee for a Responsible Federal Budget, said that while today’s lawmakers have promised to protect Social Security, their approach has largely amounted to doing nothing rather than tackling the tough reforms the program needs. wrote In November.

That leaves voters with the right to pressure lawmakers to address the program, he said.

The changes they make will determine how much Americans pay into Social Security and the amount of benefits they receive.

“The most important thing is who will be at the table making those decisions when that time comes,” Nuñez said.