Social Security Surplus Will Run Out in 10 Years, Report Estimates

(Yahoo!Finance) - Social Security's reserves are projected to run out in 2033, according to a new report, at which point the entitlement program's trust fund will be able to pay out just 77% of benefits to seniors.

That estimate is a year earlier than what was stated in the 2022 report for the Old-Age and Survivors Insurance (OASI) Trust Fund, according to the annual report released Friday from the trustees of the program. The revision reflects a 3% reduction in labor productivity and gross domestic product.

One bright spot: A projection for a key trust fund for Medicare is better. It's expected to exhaust its reserves by 2031, three years later than reported last year, after new data forecast lower health-care spending.

If the OASI was combined with the fund that pays out disability benefits — the Disability Insurance (DI) Trust Fund — the reserves would last a year more until 2034, when they could pay out 80% of benefits. But the two funds can't be combined unless there's a change in the law.

Both Social Security and Medicare face long-term shortfalls under currently scheduled benefits and financing, issues that politicians are finally starting to debate.

"This year’s Trustees Report reinforces the urgent need for Congress to shore up Social Security’s finances," Shai Akabas, director of economic policy at the Bipartisan Policy Center, told Yahoo Finance. "We have known this cliff was looming for decades, and yet every year, we delay taking action and the measures required to solve the problem get harder."

Social Security, which provides benefits to 66 million people, is mostly a pay-as-you-go program. Payroll taxes collected from workers now pay out the benefits to current recipients. For instance in 2019, 89% of the $1.1 trillion in Social Security revenue came from payroll taxes. The rest came from income taxes on Social Security benefits and interest earned on the government bonds held by the trust funds.

Part of the problem is that people are living longer and the birth rate is falling, so the ratio of workers to beneficiaries is shrinking.

Additionally, much of wage growth has gone to higher earners, reducing the percentage of wages subject to Social Security tax, administration officials said. In 1983, 90% of earnings fell below the maximum amount subject to Social Security tax. That’s down to 82%, officials said.

That means payroll taxes will contribute a smaller percentage to Social Security's revenues.

Right now, the fund’s reserves make up for that shortfall. For instance, the total cost of Social Security last year was $1.244 trillion, while revenue covered only $1.222 trillion, according to the report. The program tapped the surplus, which ended last year at $2.830 trillion, down from $2.852 trillion. That reserve is expected to run out in 10 years.

The projected shortfall for Medicare — which covers 65 million people —largely stems from the rising cost of health care. Coming changes included in the Inflation Reduction Act to curb drug prices helped to boost the fund’s outlook.

President Biden also introduced other ways to keep Medicare afloat into the 2050s in his 2024 budget proposal. His ideas included upping the tax rate on earned and unearned income above $400,000; closing loopholes that keep some “pass-through” income from Medicare taxes; and permitting Medicare to negotiate on more prescription drugs.

The president and lawmakers on both sides are starting to bring up Social Security, too. Presidential candidate Donald Trump also has made it a central issue.

Biden’s budget proposal didn’t include specific details on shoring up Social Security, instead asking Congress to work together to solve the dilemma, a move that senators blasted the administration for.

Bipartisan proposals floating around include increasing the age that seniors can get their full Social Security benefits to 70 as well as changing the formula used to calculate Social Security benefits. Both could end up hurting the people who depend most on Social Security for the bulk of their income in old age, critics — including many Democrats — have charged. Another proposal supported by many Democrats is lifting the Social Security payroll tax ceiling, which is $160,200 this year.

No matter the solution, the clock is ticking, with only 10 years to go.

"Pronouncements from both sides of the aisle that we must 'protect' Social Security from any fiscal reforms obscure a hard truth: Failing to act means imposing a substantial benefit cut on every beneficiary, starting in just a decade from now," Akabas said. "Congress must come together, make compromises, and solve this problem as quickly as possible."

Kerry Hannon contributed to this report.

Janna is the personal finance editor for Yahoo Finance. Follow her on Twitter.

By Janna Herron · Editor


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