It’s a common misconception that when the Social Security Trust Fund runs out, there won’t be anything left to pay for our Social Security benefits. This is incorrect. To understand why, here’s a brief backgrounder.
Since the last significant tax rate reform was implemented (during Reagan’s presidency), taxes collected had always been higher than payments made for benefits. The surplus went into the Social Security Trust Fund which steadily grew as this favorable scenario continued.
In recent years, however, the circumstances started to change. Payments began exceeding the collections, and the fund started declining because it had to be used to cover the shortage.
So now the question is: what happens when the fund totally runs out? At worst, complete benefits will not be given out. Why? Remember that the trust fund is only being used to cover the shortage. The main source of funds is still the taxes collected. And, the total taxes will still be enough to cover about 3/4 of Social Security benefits. In other words, without trust fund money, we can still expect to receive 75% of our benefits. That’s a relief to know, isn’t it? Better to receive something than nothing, right?
It also has to be said that this forecast is still just a forecast and isn’t set in stone. 2034 – the year when the funds are forecasted to be depleted based on the Social Security Trustees Report — is 18 years away. In between, it’s not realistic to think that the government will just let it happen. Of course, they will have to intervene. And what can they do? It will come down to a choice between who will carry the burden — the government or the public.
Redemption of special issue non-tradable government bonds is a good start. But that’s the easy part. The hard part is paying back those bonds. And if they choose to bear the brunt of the problem, they have the option to borrow funds from somewhere else, reduce government spending, or maybe redirect other funds to the Social Security Trust Fund.
On the other hand, there’s also a simpler way to solve the problem. Either increase payroll taxes, or reduce the amount of benefits. Applying these changes though will be easier said than done given that the administration that does this will most likely be looking at their last term in power since it’s highly unlikely that they will receive further support from the people if this is the solution they come up with.
The bottom line is this: as troubling as these forecasts seem like, there’s still hope that necessary adjustments can be made before it’s too late. Eighteen years is a long time to come up with a fix. The important thing is — something has to be started now. With a new president coming in, it’s about as good time as any to figure out the best possible solution to turn the situation around.