THE PROCESS
THE PROBLEM
Money in…
There’s a shortfall ahead…
More than 80% of Social
Security’s revenue comes
through the FICA (the
Federal Insurance Contributions Act) payroll tax,
which imposes a 12.4% tax
on income, with 6.2% paid
by employers and 6.2%
paid by workers. Two other
revenue sources: interest
earned on reserve funds,
and income taxes paid
on benefits by higher-income retirees.
The Trust Fund is growing and is projected to peak at about $3.7 trillion in
2022. Then it heads down as boomer retirements accelerate and bonds are
redeemed. Without reforms, the reserves would be exhausted in 2036. Why?
Longer life spans and lower birthrates mean more beneficiaries as a percentage of the population, fewer workers are paying into the system because of
high unemployment, and we haven’t raised payroll taxes for the system since
1990. Social Security needs periodic adjustment to stay in actuarial balance.
That’s why it’s required to have a 75-year outlook on its finances.
END-OF-YEAR ASSETS OF
THE SOCIAL SECURITY TRUST FUND (IN BILLIONS)
$4,000
$3,500
3.1%
81.9%
$3,000
15%
$2,500
$2,000
$1,500
EMPLOYER & EMPLOYEE
IN TEREST ON RESERVES
INCOME TAXES ON BENEFITS
$1,000
$500
FICA revenue that isn’t
needed immediately is
credited to the Social Security Trust Fund and invested
in securities issued by the
U. S. Treasury to fund government operations. Those
bonds are backed by the
full faith and credit of the
government. When Social
Security redeems bonds,
that puts pressure on the
federal budget.
1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035
…but it’s not as bad as it looks
The shortfall looks scary, but Social Security isn’t unaffordable in the context
of the huge U.S. economy. Benefits currently equal 4.84% of gross domestic
product (GDP), and will rise to just 6.22% in 2035 and then decline, remaining between 5.9% and 6.0% of GDP from 2050 through 2085, according to the
Social Security Administration. To close the funding gap, we’ll need to raise
revenue, lower costs, or do a little of both.
A formula averages and
indexes lifetime earnings
to determine benefits;
the average monthly
retiree benefit this year
is about $1,180. For 64%
of Americans 65 and over,
Social Security provides
more than half of their
income. Total benefits
this year: $727 billion.
Money out…
SOCIAL SECURITY’S COST AND SCHEDULED
TAX REVENUE AS A PERCENTAGE OF GDP
10%
HISTORICAL
ESTIMATED
8%
6%
4%
2%
1990 2000 2010 2020 2030 2040 2050 2060 2070 2080
GRAPHICS BY THOMAS POROSTOCKY; CHART SOURCES (CLOCKWISE, FROM RIGHT):
NATIONAL ACADEMY OF SOCIAL INSURANCE; SOCIAL SECURITY ADMINISTRATION ( 2)
56 AARP THE MAGAZINE
