If Social Security Trust Fund Ran Dry, What Then?

Why news of insolvency isn’t as dire as you might think

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If you follow financial news, you’ve probably seen the headlines about how Social Security’s trust fund will run out of money by 2033. While that sounds quite dire, here’s what it would actually mean for retirement benefits. 

Key Takeaways

  • The Social Security trust fund is projected to run out of money by 2033, but that doesn’t mean benefit payments would stop.
  • 2033 is a year earlier than the last annual forecast because of the pandemic’s financial impact.
  • If the trust fund ran out, Social Security benefits would continue to be paid, but at a reduced rate—76% of the levels retirees are entitled to.

The trust fund that helps pay for Social Security retirement benefits took a financial hit from the pandemic and is now projected to be depleted in 2033, a year earlier than previous annual estimates, according to a trustee report released Tuesday by the Social Security Administration. However, depletion by 2033 wouldn’t mean the end of Social Security payments. Yes, they would be lower, but they would continue at 76% of normal levels, data from the report shows.

Here’s how it works. 

Social Security retirement benefits are funded by a payroll tax that takes a 6.2% bite out of workers’ paychecks, with their employers kicking in an equal amount. (Self-employed people pay the entire 12.4%.) That money goes into the trust fund, which also earns interest to fund Social Security’s benefits. Most years, there has been more money coming into Social Security than going out, which has allowed it to build up the fund. But now, without enough tax revenue coming in to pay for all the benefits owed, the trust fund is being tapped to make up the difference, and will be exhausted by 2033, according to the latest estimate.

Indeed, in 2021, for the first time since 1982, the program will spend more than it takes in, the trustees said in the report. Those deficits are projected to continue from here on out, thanks partly to increasing costs from an aging population and lower birth rates—meaning fewer young workers paying into the program. 

If money in the trust fund runs out, tax revenue would keep coming in, and payments could be made directly out of that tax money, instead of the trust fund. While Social Security payments would either have to be smaller, or the same-sized checks would arrive less frequently, beneficiaries wouldn’t go without payments—they would just receive less. 

To avoid sudden benefit cuts, Congress could, at some point before the money runs out, make changes to both funding and benefits to bolster the program’s finances. This has happened in the past. Lawmakers increased taxes and decreased benefits to keep Social Security in good financial health in 1977, and it stepped in again six years later to increase taxes and raise the age of eligibility, among other changes, to put the program on better footing.

Various proposals to overhaul Social Security have been kicking around in Congress again— several were introduced this year—but so far none have been adopted.

In a 2020 report on what would happen if the trust fund ran out, the Congressional Research Service noted that this would put the Social Security Administration in a bind: it is legally required to pay full benefits, but also not allowed to spend more money than it has. If the administration made reduced payments, beneficiaries could take legal action to claim the rest, the researchers said.

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.