Since Social Security was established in the 1930s, Americans have paid into the system with the faith that when they retired or became disabled, they would receive the benefits to which they were entitled. However, that faith has dwindled in recent years, with politicians and citizens alike asking: what happens if Social Security runs out of money?
How Social Security Works
To understand what changes may be coming, you have to understand the basics of how Social Security works.
The payroll taxes you pay today go toward the benefits people receive today. When you retire or become disabled, the people who are working and contributing to the system at the time are the ones providing your benefits. Those contributions make up about 75 percent of the money the Social Security Administration distributes to beneficiaries.
The rest of the money comes from the Social Security Trust, an account that was created back when the SSA collected more taxes than it actually needed to cover eligible beneficiaries. It is that trust which is running out of money, and the SSA estimates the money will run out in 2034. So while worker contributions will continue to cover at least 75 percent of benefit payments, they won’t be enough.
How Social Security Is Changing
The number of people receiving Social Security benefits has increased steadily since the program began. Yet it’s not just the number of beneficiaries that gives us a clear picture of Social Security’s future. The ratio of covered workers to beneficiaries is changing, too.
Your monthly benefits wouldn’t be enough to survive on if they consisted of just the taxes paid by one worker. Multiple workers contribute to every beneficiary’s payments. The problem is, the ratio of workers to beneficiaries is steadily declining.
- In 1940, the ratio of workers to beneficiaries was 1:159.4. So for every one beneficiary, there were 159.4 workers paying into the system.
- In 1970, that ratio was 3.7.
- The ratio dropped below 3 in 2010.
- The ratio is expected to reach 2.1 in the year 2040.
Another reason the Social Security fund is challenged is that life expectancy has increased since the program began.
- For an American born in 1900, the average life expectancy was just 47.3 years old.
- For an American born in 1950, the average life expectancy is 68.2.
- For an American born in 2007, the average life expectancy is 77.9.
An eligible beneficiary will receive benefits until death, so the longer people live, the more money the system has to pay out.
A Few Possible Solutions
The U.S. government may make changes to the law, which will affect the future of Social Security. Lawmakers and the SSA are considering several possibilities.
- Raising the retirement age would keep more workers paying taxes and lower the number of beneficiaries. However, this is an unpopular option with citizens, who don’t want to keep working past 65 or 66.
- Instituting a system called longevity indexing would allow the SSA to pay out slightly lower payments. This policy would help the system remain solvent, but it could be financially devastating for low-income earners who don’t have savings and other assets to rely on when they retire or become disabled. One possible alternative is to adjust payment amounts so that high-income earners receive smaller benefits, on the basis that these earners don’t need their benefits as much.
- Changing the payroll tax cap is another option. Currently, earnings over $118,500 aren’t subject to Social Security taxes. Raising or eliminating that cap would bring more money into the system, but it could hurt the economy by costing businesses and earners more than they currently pay.
The future of Social Security is tied to the choices of the President, Congress and the Senate, and it is difficult to say for sure what will happen. The struggle with Social Security is a contentious issue and will likely continue to be one in the coming years.
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