The Social Security Board of Trustees has released its annual report on the long-term financial status of the Social Security Trust Funds, and it is not looking good.
There are actually two parts to Social Security (OASDI). The Old-Age and Survivors Insurance (OASI) program provides monthly benefits to retired workers, families of retired workers, and survivors of deceased workers. The Disability Insurance (DI) program provides monthly benefits to disabled workers and families of disabled workers.
The Social Security program is funded by a 12.4 percent (10.03 percent OASI and 2.37 percent DI) payroll tax (split equally between employers and employees) on the first $142,800 of an employee’s income. Self-employed individuals pay the full 12.4 percent but also receive both a reduction in their net earnings from self-employment and a tax deduction equal to 50 percent of the amount of the Social Security tax they paid.
The Trustees Report says that Social Security paid about 65 million beneficiaries benefits totaling $1.096 trillion in 2020. It estimates that “175 million people had earnings covered by Social Security and paid payroll taxes.” Administrative costs were $6.3 billion.
The Social Security Act of 1935 requires that the board report annually to Congress on the actuarial status and financial operations of Social Security’s two trust funds. According to a Social Security press release: “The combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds are projected to become depleted in 2034, one year earlier than projected last year, with 78 percent of benefits payable at that time.”
Although this figure sounds dire, many Americans don’t seem to mind lower Social Security benefits. Over half of Americans opt to retire early at age 62 and receive a reduced Social Security benefit that is 25 to 30 percent less than what they would receive if they waited until their full retirement age (66–67, depending on the year they were born).
Will Social Security be insolvent in just 13 years? Will the Social Security trust funds run dry? Will Social Security recipients have their benefits trimmed by 22 percent? Will yearly cost-of-living adjustments have to eliminated? Will the retirement age have to be raised like it was in 1983? Will the payroll tax cap have to be eliminated and people begin paying Social Security tax on all of their income, like Medicare? Will taxes have to be increased on Social Security benefits? Will Social Security benefits have to be means-tested to make sure there is enough money to pay benefits to those who really need it? Will Social Security taxes have to be raised to restore the system to sound financial health? Will Social Security have to be privatized to save it for future generations? Will Congress have to bail out Social Security?
None of the above.
Since 2010, the cost of Social Security has exceeded its income from payroll taxes and taxes on Social Security benefits. These annual deficits are made up by interest income and by drawing on the Social Security trust funds, both of which are government accounting fictions. The trust funds contain nothing except IOUs that the government has issued to itself over the years. There isn’t a single retirement account with anyone’s name on it, and payroll taxes collected are immediately spent to provide current Social Security payments. All taxes collected over benefits paid are “invested” in U.S. government securities on which interest is credited. Any Social Security “deficit” is made up from the federal government’s general fund, so Congress doesn’t need to bail out Social Security. It can simply keep channeling general tax revenues to Social Security indefinitely, as it currently does to repay the trust fund’s special Treasury bonds.
There is no connection between the taxes one pays into Social Security and the benefits one receives from Social Security. There is no contractual right to receive benefits. In fact, Congress can change the way it calculates benefits at any time, change the retirement age at any time, means test benefits at any time, and change the way it taxes benefits at any time. Congress can reduce or eliminate benefits at will independently of adjustments in the tax rate or wage base.
Although Congress doesn’t need to bail out Social Security, and benefits could be paid in perpetuity out of the U.S. Treasury regardless of the amount in Social Security taxes that is collected, this doesn’t mean that benefits should be paid.
This is because Social Security is an entitlement program, an income-transfer scheme, and an intergenerational wealth-redistribution plan whereby money is simply taken from those who work and given to those who don’t. The taking of someone’s income for the purpose of giving it to someone else, whether the government takes it or a thief takes it, is immoral, no matter what the supposed good intentions of the taker may be.
Even if Social Security were financially sound, even if it were a real retirement program, even if it were funded voluntarily, and even if it had real trust funds—the federal government still has no authority to set up and administer retirement, disability, survivor, or pension plans for private-sector workers.