Social Security soon will not be able to pay full benefits. That’s because starting in 2010, a full decade ago, the payroll tax was not enough to cover payments in the future.
The big question then becomes, how long will the fund last? As of now, the fund is expected to run out sometime between 2032 to 2035.
At that point, benefit payments wouldn’t completely stop though they would become only 76% of what was promised. That’s a big hit for the 25% of Americans who live entirely on Social Security.
More than half (57%) of retirees report that Social Security will be their main source of income.
“Social Security faces a big mismatch between the revenues that it is scheduled to take in and the benefits that are scheduled to pay out,” Gopi Shah, deputy director and senior fellow at the Stanford Institute for Economic Policy Research, told CNBC.
“In 2020, we’re paying more in benefits than we’re receiving in revenue.”
Gary Burtless, senior fellow of economic studies at the Brookings Institution, echoed this sentiment.
“The trust fund is very near its all-time peak in terms of dollars. It’s not near a peak in terms of how many years of benefit payments we can afford to spend out of the trust fund,” he said.
The sooner the Social Security dilemma is solved the better. The benefits being paid out now comes from taxes present-day workers, and there’s not enough of them.
Every working American has 6.2% of their wages taxed on income they earn up to $137,700. Employers must match this amount.
If you are self employed you are the employer and the employee, so 12.4% of your income is taxed and deposited into the Social Security trust fund.
In 2021 the income ceiling rises to $142,800.
Shortfall
The collected taxes are deposited into the fund is invested in interest-bearing Treasury securities. In 2020 the fund earned an average interest rate of 2.5%.
The interest generated by the fund has, until now, been able to cover whatever deficit that the payroll tax didn’t cover. Low bond interest rates have compounded the problem.
In 2019, for instance, interest on Treasuries covered $81 billion in benefit payments. This will no longer happen starting this year, 2021.
Instead, to pay out benefits, the fund will have to draw against principal — actual taxes collected.
The incoming Biden administration has proposed raising placing the Social Security tax on self-employed income starting at $400,000 — a “doughnut hole” approach that would protect those earning more than $142,800 for now but gradually close over time as the ceiling is adjusted for inflation.
It remains to be seen what form legislation might take. Democratic control of the Senate could help the president achieve his priorities, but the slow-burning house fire called Social Security may not be the first order of business as the pandemic rages.
