Each year around this time, the Social Security Trustees issue a report on the system's financial condition. The latest report projects that the system's “trust fund” will be exhausted in 2032. The trust fund is an unfortunate misnomer because it creates the impression that all the funds workers’ pay into the system go into an account that will ultimately pay their benefits when they retire, much like a traditional pension plan or 401(k).

However, that was never the basis of the Social Security system. It was never a retirement savings program like a pension or a 401 (k). Rather, Social Security was designed from the outset to be a transfer of income from those working to those who were retired. The money you paid into Social Security did not go toward establishing an account for you; it went to pay for the benefits for your parents and grandparents.  We know this is true because Social Security began paying its first monthly benefits in 1940, just three years after payroll taxes were first collected in 1937. Obviously, those initial beneficiaries had not contributed enough to the system to cover their benefits.

Nonetheless, the system worked because, for most of its existence, far more people were working and paying into it than were collecting benefits. Indeed, for 69 of the system's 88 years, the payroll taxes collected exceeded the benefits paid out. That excess accumulated and was invested in U.S. bonds. This is the “trust fund” so frequently referred to.  In the Trustees’ report, these funds are referred to as reserves.

The reserves hit an all-time high of $2.8 trillion in 2020. However, since then, the system has been paying out more in benefits than it collects in payroll taxes. As of the latest report, the reserves are down to $2.3 trillion.  According to the latest projections in the Trustees’ report, that amount will go to zero in 2032. (A schedule of the system’s income and benefit payments since its inception is available at Appendix VI(A) of the report.)

However, the system will still be collecting payroll taxes, just not enough to pay the currently scheduled benefits. Under current law, benefits would have to be reduced to match incoming revenue. The Trustees’ report estimates that after the reserves are depleted, incoming payroll taxes will cover only about 78% of the benefits currently scheduled.

The projection also shows that conditions will gradually worsen unless something is done to equalize the system’s income and benefit payments. Without any adjustments, the payments will continue to decline, with the system only paying 62% of the current benefits by 2100.

The financial straits the system faces are driven by demographic factors – primarily falling birth rates and seniors living longer. And contrary to the social media “experts,” a decline in immigration also puts pressure on the system. My colleague at the Baker Institute, John Diamond, has written an excellent, detailed analysis of the system's current financial condition if you want a deeper dive into the numbers.

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Author’s note: The Trustees are making some very questionable assumptions about birth, which John touches on in this analysis. I will be writing in more detail on their birth-rate assumptions soon.