Social Security Funding Shortfall

By Dan Weisman For more information, see: Social Security

Overview

Before Social Security came to pass into law in 1935, almost half of elderly Americans lived below the income poverty line, according to the Center on Budget and Policy Priorities. The Social Security system was created as a transfer payment program whereby current worker earnings were converted into future income. Around 12 percent of elderly citizens today are considered poor, which is considered a tribute to the system. Income is transferred from those working to retirees. It has been based on the assumption that each subsequent generation would be able to continue contributing enough to keep the system of retirement payments solvent. While Social Security has not experienced funding shortfalls through 2011, the declining number of workers paying into the dedicated fund coupled with increasing number of claimants were expected to create funding shortfalls of increasing amounts threatening fund surpluses and savings by 2037 with the first budget shortfall in 2012. Social Security at some point would have to cash in its Treasury Bills before going into deficit. However, some kind of action is expected involving additional funding or benefit re-adjustments. The most surprising aspect of the entire Social Security funding shortfall issue, though, may be the fact the program trust fund has built up a $2.5 trillion surplus since 1985. However, the surplus was tapped by Congress and the federal government repeatedly to pay for other programs, sapping much of the surplus.

History/Proposed Changes

Social Security came into law with legislation signed in 1935. The early days of the Social Security program paid benefits when workers reached age 65 and were fully retired. Congress changed the retirement age numerous times; as of 2011, 62 is considered retirement age.

Various solutions have been proposed to alleviate expected funding shortfalls. These include:

Reduce the Social Security cost-of-living adjustment.
Increase the number of years used in calculating Social Security retirement and survivors' benefits.
Modify the formula used to calculate initial benefits.
Increase retirement age to age 67.
Reduce or eliminate benefits for workers with higher incomes.
Raise Social Security payroll tax rates.
Increase the portion of Social Security benefits subject to IRS payments.
Increase the amount of earning subject to the Social Security tax.
Extend Social Security coverage to all new employees of local and state governments (who are now Social Security excluded and covered by state plans).
Invest Social Security reserve funds in the stock market.
Use Treasury Department general revenues to make up the long-range deficit.
Require or allow workers to invest a portion of their wages into individual retirement investment accounts.
Use budget surpluses from other agencies to provide individual investments accounts.
Return to pay-go funding, setting payroll taxes at levels needed to fund benefits.

The entire $5.3 trillion shortfall over the next 75 years could be wiped out if payroll taxes for workers and employers increased 1.1 percent, according to the U.S. Senate Special Committee on Aging. Or, if annual cost-of-living increases were reduced 1 percent by Congress, about three-fourths of the shortfall would evaporate, the committee said.

Present Day

The individual earnings cap is $106,800 in 2011 with employees paying a 6.2 percent Social Security tax. That employee tax is matched by employers. While benefits can be collected starting at age 62, full benefits can only be claimed if started at age 66 or later. Social Security also provides disability benefits for more than 5 million disabled workers with severe physical or mental impairments preventing them from working. Family benefits are provided to about 3 million spouses and 2 million children of retired and disabled workers. Survivors' benefits are paid to more than 7 million survivors -- 2 million of which are children -- of deceased workers.

Social Security actually continues to run surpluses from its dedicated funding source, taxpayers. That surplus is expected to end. It is invested in U.S. Treasuries considered the world's best investment. However, with baby boomers retiring and birth rates declining, the surplus is expected to end at some point before 2037.

Social Security paid out $727 billion in 2011, or about 4.8 percent of national gross domestic product, according to the Congressional Budget Office (CBO). By 2021, CBO estimated Social Security payments would be about $1.3 trillion, about 5.3 percent of GDP, providing benefits for 71 million people. Debates about proposed plans to deal with projected Social Security funding shortfalls revolved around issues including fairness and the actual extent of the problem.