When Will Social Security Run Out?

FT Contributor
A woman writing on a Social Security application form.

Social Security is a longstanding program, yet few people genuinely understand what it is or the variety of benefits it offers. The federal government runs and administers Social Security. It provides a source of income to those who qualify under at least one of four different categories of benefits:

  • Retirement benefits.
  • Disability benefits.
  • Benefits for spouses and familial survivors after a wage earner has passed.
  • Supplemental security income.

In essence, Social Security is meant to provide a livable wage to those who qualify for its benefits. Over time, though, this assumption has come into question.

For a variety of reasons — outlined in further detail below — Social Security funds will likely run out by the year 2037. However, the term “run out” can be misleading and deserves further investigation.

Table of Contents

How Is Social Security Funded?

With so many payments going to so many citizens, a question that naturally arises is how Social Security is funded in the first place. How can the federal government afford to pay out so much money, regardless of the Social Security Administration’s (SSA) developing financial concerns?

The answer lies in taxes. Social Security funds are collected via the Federal Insurance Contributions Act. This act, also known as FICA, collects 6.2% of each citizen’s income, along with an equivalent amount that is matched by their employer.

This percentage applies to up to $137,700 of an individual’s earnings, at which point the tax is capped.

Problems With Social Security

The primary factor behind the financial concerns currently facing the Social Security Administration is the effect of an aging population. While it’s tempting to assume that this is due to the fact that people are living longer, that simply isn’t the case. As with most concerns on this scale, there are several different factors at play.

According to the SSA, the driving factor behind the United States’ struggles with population aging is the simple fact that birth rates have dropped from three children per woman to two children per woman. This has the effect of decreasing the number of funds available to be collected through the FICA tax, as fewer wage earners are being born.

Exacerbating this trend is the fact that baby boomers are retiring from the workforce at a staggering rate of 10,000 people per day. In addition, while life expectancy in the U.S. has dipped in the last few years, it doesn’t erase the fact that the average lifespan has increased by nearly 10 years in the last half-century.

These two complementing elements have led to a large number of individuals who are both claiming Social Security benefits at younger ages and then living significantly longer.

When the decrease in the birth rate is coupled with the acceleration of retirees and the overall increase in life expectancy, these factors combine to form a storm of challenges that will eventually compromise the Social Security Administration’s ability to pay its scheduled benefits in full.

The Future of Social Security

The key factor to keep in mind here is the fact that Social Security benefits don’t end in 2037. Qualified recipients will simply no longer be compensated at a full 100% of their previously scheduled benefits. This is largely due to the eventual draining of the Social Security trust fund.

The SSA itself has estimated that by 2037 the reserves in the Social Security trust fund will be exhausted. This fund supplements the FICA tax in order to pay current benefits in full. Once the fund is depleted, the remaining FICA tax income will only be able to cover 76% of the scheduled benefits. In other words, by 2037, the Social Security Administration will only be able to pay out roughly three-quarters of its benefits.

What Can Be Done?

There are several things that can be done to address this impending crisis. In 2016 Carolyn Colvin, the Acting Commissioner of the SSA, estimated that once the entire baby boomer generation is retired, the total cost of Social Security will rise from 5% to 6% of the Gross Domestic Product (GDP) of the nation. This 1% increase, while significant, is not impossible to address.

For instance, there is already a steady push from politicians to take action regarding Social Security funding concerns. The Social Security Board of Trustees has suggested that either raising the combined (i.e. both employer’s and employee’s contributions) FICA tax from 12.4% to 14.4% or lowering the current benefits by 13% would enable the full scheduled benefits to continue for another 75 years.

Lawmakers could also increase the taxable income cap, reallocate other federal revenue, or utilize a combination of any or all of these options.

In addition, individuals can take steps to prepare for retirement on their own. The most common retirement options currently utilized include setting up an IRA and contributing to a 401(k).

Along with this, it may be wise to assess your financial health, address runaway debt, and then create a budget that allows you to save from an early age. Saving when you are younger enables you to benefit from compound interest more effectively.

It can also be helpful to pick up a side gig or other source of income to help you save, invest when you have a financial windfall, and take full advantage of an employer retirement contribution match. All of these financial strategies will allow you to save more aggressively and will put you in the best possible position, regardless of the state Social Security is in when you retire.

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