You Won’t Lose All Your Social Security Benefits
Don’t panic, learn how Social Security is funded.
The Social Security OASI Trust Fund for retirement benefits is projected to be exhausted by 2033, according to the summary of the Annual Social Security and Medicare Trustees Report that was released in August 2021. That’s one year earlier than what was projected in the 2020 trustees report.
Does this mean that in 2033, retirees will receive nothing from Social Security?
Absolutely not!
The Social Security OASI Trust Fund is a supplemental source of funding for retirees’ Social Security benefits, supporting about 24% of the total cost of the program. FYI: The official name for Social Security retirement benefits is “Old-Age and Survivors Insurance,” hence the acronym “OASI.”
The primary source of funding for the OASI program is FICA taxes paid by workers and other sources, including federal income taxes on retirees’ Social Security benefits; these sources support about 76% of the program’s total cost. If the trust fund becomes depleted and Congress doesn’t act to shore up the system’s finances, in 2033, the Social Security Administration could still afford to pay about 76% of total benefits. While a 24% across-the-board benefit reduction would certainly be bad news, let’s be clear: Your benefits are not going to disappear completely.
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The trustees report also conveys results for the Disability Insurance Trust Fund, which, combined with the OASI Trust Fund, are referred to jointly as the OASDI Trust Funds. The latest report relates that the combined funds are projected to be exhausted by 2034 and, at that time, about 78% of total benefits could still be paid.
This latest trustees report reflects the economic impact of the COVID pandemic, which is one reason why the estimated dates for depleting the trust funds have advanced by one year since the 2020 report. But we can gain further insights into Social Security’s financing by understanding the role of the actuarial assumptions that Social Security’s actuaries make to analyze Social Security’s finances.
The actuaries must make many critical assumptions about future experience during the next 75 years, including these:
- Growth in productivity, wages, and the Consumer Price Index
- How long retirees and beneficiaries will live
- Rates of unemployment and disability
- Changes in immigration and fertility
The actuaries don’t use a crystal ball to make these assumptions—they prepare extensive research to make their best estimate of future experience regarding these assumptions. As you can imagine, in spite of their best efforts, it’s likely that actual future experience will be different from their assumptions.
As a result, to demonstrate the sensitivity of the assumptions on the results, the actuaries prepare three sets of analyses of the system’s finances:
- “Intermediate assumptions” (their best estimate)
- “Low-cost assumptions” (optimistic)
- “High-cost assumptions” (pessimistic)
The depletion years described previously are for the intermediate assumptions (best estimate).
The 2021 trustees report also projects that the combined OASDI Trust Funds would become exhausted in 2061 under the low-cost assumptions and by 2031 under the high-cost assumptions.
The 2021 trustees report also reveals that the long-term financial deficit of the combined OASDI program is 3.54% of workers’ pay that’s covered by the program. This means that Social Security could be balanced financially and prevent across-the-board benefit cutbacks if Congress adopts a package of reforms with a total value of about 3-1/2 cents for every dollar earned by workers. This package would be a combination of benefit reductions applied to current and future retirees, plus tax increases applied to both workers and their employers.
Of course, benefit reductions and tax increases won’t be popular. But these actions are necessary to maintain Social Security’s long-term integrity and to restore Americans’ confidence in the system. The price to pay seems very doable if Congress can find the political will to make the necessary decisions.
