According to the 2021 annual report of the Social Security administrators, the trust funds that pay for retirement, disability, and other benefits will be depleted by 2034. That’s a year earlier than administrators projected in their 2020 report.
That does not mean that Social Security will cease to exist; Instead, the system will deplete your money reserves and you will only be able to pay what you receive each year from Social Security taxes. If this happens, Social Security will be able to pay about 78% of the benefits to which retired and disabled workers are entitled.
The money in the trust funds – one for OASDI, or “Senior and Survivor Insurance” (the official name for benefits paid to retirees and their families), and one for disability benefits – comes from three sources:
- 89.6%, of the 12.4% of Social Security taxes paid from most of the income of workers in the country: FICA taxes on payroll (and proportional contributions from employers) or SECA taxes, which pay the people who are self-employed, using IRS tax returns.
- 3.6% of the income taxes that Social Security beneficiaries pay from their benefits.
- 6.8%, of interest on the money of the trust funds.
The trust funds had $ 2.9 trillion ($ 2.9 trillion) in reserve at the end of 2020, but the benefit payments being made increasingly exceed revenue due to demographic and actuarial trends. Large numbers of boomers swell the ranks of retirees (in addition to living and collecting benefits longer), and due to the low birth rates of subsequent generations, fewer workers contribute to Social Security.
The coronavirus pandemic has also had an impact on the system’s long-term finances, as large-scale job losses reduced revenue from payroll taxes that largely fund Social Security.
If no changes are made, the system will end its reserve funds by 2034. For years, lawmakers and policy experts have debated proposals to increase Social Security finances. Most fall into two general categories: changing tax policies to direct more money into trust funds, or making adjustments to the benefit formula to reduce costs (or a combination of both).
The FICA and SECA taxes also generate a source of income for Medicare, which flows into the trust fund that funds Medicare Part A (hospitalization coverage). The 2021 report from Medicare administrators projects that the fund will run out of reserves in 2026, after which Medicare will be able to pay 91% of scheduled benefits.