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Yahoo
26-06-2025
- Business
- Yahoo
Social Security Retirees Just Got Bad News
Two new reports spend a good deal of time examining the solvency of the Social Security program. While Social Security's finances have been on the fritz for quite some time, the situation appears to be worsening. The $23,760 Social Security bonus most retirees completely overlook › Although Congress has yet to act, it is well known that Social Security's rainy-day funds will soon run dry, and revenue from Social Security's payroll taxes will not be enough to cover projected future benefits. Each year, the board of trustees of the Federal Old-Age and Survivors Insurance (OASI) Trust Fund and the Federal Disability Insurance (DI) Trust Fund releases annual reports, updating the country on the financial situation of the trust funds and the Social Security program as a whole. While the message over the years has been fairly consistent, the 2025 annual report just gave Social Security retirees bad news. Social Security has begun to encounter financial challenges due to shifting demographics. More baby boomers are reaching retirement, and there are fewer young workers than there once were to pay taxes into the system. According to the Population Reference Bureau (PRB), the population of Americans age 65 and older is expected to jump from 58 million in 2022 to 82 million in 2050. Their proportion of the population is projected to increase by 6% to 23%. When revenue from Social Security payroll taxes can no longer cover scheduled benefits, the Social Security Administration draws from the OASI trust fund, which it has been doing for a while now. Once that fund is tapped, it can get approval from Congress to draw from the much smaller DI fund. Last year's trustees report indicated that when accounting for both trust funds, Social Security's reserves will be depleted by 2035, at which point revenue generated from Social Security taxes would be enough to cover only 83% of scheduled benefits at that time. This year's report suggests an expedited timeline. The trust funds are now expected to be depleted by 2034, at which point there will be enough tax revenue to cover only 77% of scheduled benefits, significantly lower than last year. It's common for the annual reports to show different projections, but this year was heavily affected by a new Social Security law that will either increase benefits or provide benefits to retirees who may not have previously received them. The Social Security Fairness Act eliminated two provisions: the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). Both provisions reduced or eliminated benefits for some federal and state workers who received pensions from jobs that didn't necessarily pay Social Security taxes. The group includes teachers, firefighters, and police officers in many states, as well as federal workers under the Civil Service Retirement System and workers under a foreign social security system. Additionally, the annual report noted changes in assumptions, including a longer recovery in fertility rates off of current low levels and slightly lower long-term wages as a percentage of gross domestic product, resulting in lower payroll taxes. Given the number of voters who claim Social Security, I think most Americans expect Congress to eventually shore up the program, even if they leave it to the very last minute. A sizable portion of Social Security retirees relies on benefits as the primary source of income, so any potential cuts could lead to a crisis among this population if they no longer have the funds needed to cover critical expenses, such as housing, healthcare, and food. Like most other financial issues, the main ways to solve Social Security are to cut benefits or raise taxes. Social Security payroll taxes are currently 12.4%, evenly divided among employers and employees. Self-employed employees must cover the total amount on their own. Republicans typically favor curbs to the program, such as raising the age at which retirees can claim full benefits, while Democrats seem largely in favor of tax hikes. Taxes are only levied on a maximum of $176,100 of a worker's income (in 2025), so Congress could raise this cap to cover the shortfall or increase taxes on the wealthiest Americans. Either way, difficult decisions will need to be made over the next eight or nine years. 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The Hill
24-06-2025
- Business
- The Hill
Social Security's dirty little secret: A Game of borrowing
The Social Security trustees have released their annual report highlighting 'the current and projected financial status' of the Social Security trust fund. And the media duly reported on the fund's declining prospects. But neither the trustees nor the media revealed, or typically even acknowledged, the trust fund's dirty little secret. First, a short explanation of how Social Security works. Social Security is a pay-as-you-go system. The FICA payroll tax (12.4 percent) is taken from current workers and employers and deposited into the Social Security trust fund. The government then uses that trust-fund money to pay current retirees. Money in, money out. For most of Social Security's history, current workers were paying in more than was needed to pay retiree benefits, leaving annual trust-fund surpluses. This is why, today, the trust fund boasts some $2.5 trillion in assets, which leaves the impression that there is something like a savings account that can be used to pay Social Security benefits. Unfortunately, however, since 2010 the government has spent more paying benefits that it has received from workers' payroll taxes each year. The government has had to draw upon the trust fund surplus to make up the difference. According to what the trustees call their 'best estimates,' 'The Old-Age and Survivors Insurance (OASI) Trust Fund [that is, Social Security] will be able to pay 100 percent of total scheduled benefits until 2033, unchanged from last year's report. At that time, the fund's reserves will become depleted and continuing program income will be sufficient to pay 77 percent of total scheduled benefits.' The key thing to notice is the claim that by 2033 'the fund's reserves will become depleted.' But what if the trust fund is already essentially, if not technically, depleted? The trustees report that the OASI trust fund had $2.641 trillion at the end of 2023. The trust fund received $1.106 trillion in payroll taxes in 2024, plus $54 billion from taxes collected on Social Security benefits and $64 billion in interest. That's a total income of $1.224 trillion. However, Social Security paid out $1.327 trillion in 2024 — more than it received — meaning it had to withdraw $103 billion from the trust fund, leaving $2.538 trillion. And then here's the dirty little secret about the trust fund: That $2.5 trillion isn't invested in stocks or bonds or loaned out to interest-paying banks or companies. The federal government has borrowed that money and spent it, writing itself interest-bearing IOUs. As the Peter G. Peterson Foundation explains, 'As with other trust funds, Social Security's surpluses are credited with securities issued by the Treasury; that excess income is used to reduce the amount of new federal borrowing necessary to finance governmental activities.' Consider this situation in a family context. Suppose a family's income is usually enough to pay the bills each month. But an unexpected debt — perhaps a car repair bill, a hospital visit, home repair, etc. — arrives, and it's more than the family's normal budget. If the family has other real assets, it can withdraw funds from a savings account or perhaps a brokerage account and pay the debt. Problem solved. But if the family doesn't have other real assets available, it might have to borrow the money to pay the debt — creating new debt to pay old debt. When the trustees speak of drawing down the 'fund's reserves,' it sounds like the government is doing what the family did when it tapped other assets to pay the unexpected debt. But that's not what's really happening. If the government's general account had a budget surplus in 2024, then the government could just transfer $103 billion from the general account to the trust fund. But the federal government had a $1.8 trillion deficit in 2024. So, in order to cover that $103 billion trust fund shortfall to pay current retirees, the government had to borrow the money. Creating new debt to pay old debt. It's even borrowing money at interest to pay the trust fund interest. Whenever anyone exposes this borrowing shell game, defenders of Social Security's pay-as-you-go system — usually Democrats — vigorously respond by saying the federal government has never defaulted on its debt. But that misses the point. The trust fund's assets are just an entry on paper. If the Social Security trust fund wants to redeem some of its IOUs, the government must borrow the money to pay it. So, when the trustees warn that by 2033 Social Security won't have the money to pay retirees' full benefits, it would be more accurate to say it already doesn't have the money to pay full benefits now. Merrill Matthews is a public policy and political analyst and the co-author of 'On the Edge: America Faces the Entitlements Cliff.'.
