Will Social Security in the US Run Out?

The discussions surrounding the possibility of the Social Security (SS) fund running out in the United States have been prominent, especially during the recent political upheavals. With the biggest turnover of GOP seats ever recorded and the looming exit of the Baby Boomer generation, many seniors feel emboldened to take action, submitting that too many 'morons' who led to this crisis must be voted out of office. Let's dive into the reality of how the Social Security system functions and what the future holds.

The Historical Context

Over the years, Social Security has primarily been a self-sustaining system, funded by contributions from employees, employers, and payroll taxes. However, the dynamic of income and expenses has recently shifted. For many years, the inflow of money exceeded the outflow, with the surplus often being redirected to general government purposes through IOUs (loans from the U.S. Treasury).

This reliance on IOUs was a means of masking excess government spending. The 'trust funds' were essentially accounting entries that recorded the hidden spending. With the economic challenges of the past few years, the system has now reached a critical tipping point: more funds are being drawn out than paid in, and the burden of paying back these IOUs is increasing the federal deficit.

Future Projections and Adjustments

The concern over the depletion of these 'trust funds' is valid. In approximately 10-15 years, by 2034, the last of these IOUs are expected to be settled using money from general funds. At this point, the trust fund will be depleted, and social security payments will need to be reconciled with the current tax revenue, potentially leading to a 25% reduction in benefits, as only that amount of tax money will be available.

Medicare's Trust Fund

It is also worth noting that Medicare's 'trust fund' is anticipated to reach its peak depletion a few years before Social Security. As the Baby Boomer generation exits the workforce, there will be fewer contributors to the system, exacerbating the funding issues.

The Political Response and Potential Solutions

Politically, lawmakers face a daunting challenge. One proposal is to slowly increase the age at which individuals can receive full retirement benefits and to increase the amount deducted from participant paychecks. This gradual adjustment over a 20-year period aims to mitigate any short-term financial strain. However, adjusting the full retirement age from 65 to 67 is not an overnight change and typically takes years to fully phase in.

Another challenge is the effectiveness of cost-of-living adjustments (COLAs). Aging individuals, who are the most reliable voters, seek fair treatments, and drastic adjustments can lead to public revolt. Moreover, inflation has significantly eroded the purchasing power of each dollar, making adjustments crucial.

Privatization as a Controversial Option

Some argue for the privatization of Social Security, suggesting that individuals could control their retirement funds. However, this idea faces significant opposition. People are unlikely to support privatization without a compensatory guarantee, such as a one-time payout based on the present value of their future benefits, which would be a substantial government expenditure.

Given the current political landscape and the emphasis on social justice, the idea of privatization is unlikely to gain widespread support. Instead, politicians are more likely to continue with phase-in adjustments, incrementally increasing the age for full benefits and the amount deducted from paychecks, while also increasing the taxable income threshold.

Conclusion

While the possibility of Social Security running out seems realistic, the system's future is not entirely bleak. Through a combination of gradual adjustments and reforms, it is possible to ensure its sustainability for generations to come. What matters now is the political will to act and address the looming fiscal challenges.

For further information, please explore the following resources:

Understanding Social Security Understanding Medicare Government Spending on Social Security