We’ve recently been hearing similar questions about the solvency of the Social Security system we were asked a few years ago, expressing a concern that the fund will run dry. Maybe because it’s an election year, and reform requires cooperation from Washington. Or maybe it’s because a new wave of retirees are at or approaching the age where Social Security benefits (or lack thereof) directly impact their monthly income.

There haven’t been significant changes to the Social Security System or the solvency projections in the past few years, so let’s review where things stand.

The overall health of the Social Security program, while not great at current, is still better than many people realize, and we want to share some important details about the program itself so that we can make better decisions together.

From our perspective, much of the misunderstanding of Social Security stems from the media’s focus on the shrinking “Social Security Trust Fund.” To be clear, the issue with the trust fund is not a problem of fund management as people are inclined to believe, but of demographics and longevity.

As baby boomers retire and lifespans have gotten longer, this has caused a corresponding bulge where benefits owed exceed payroll tax revenues. Until recently, Social Security provided benefits via a combination of current payroll taxes and interest earned on the trust fund principal.

But that changed in 2021 when Social Security started tapping the principal of the trust fund to meet the shortfall. This is expected to continue until approximately 2033, at which point the trust fund will be depleted. This is the point where most of the misunderstanding occurs.

The article “Social Security’s Financial Outlook: The 2023 Update in Perspective from the Center for Retirement Research” explains:

“The depletion of the trust fund does not mean that OASI is “bankrupt.” Payroll tax revenues keep rolling in and can cover 77 percent of currently legislated benefits initially, declining to 71 percent by the end of the projection period.”

As implied, it’s commonly overlooked that Social Security has operated primarily as a pay-as-you-go system throughout its history. In 2024, for example, Americans pay 6.2% of income up to $168,600 to Social Security, and employers match that contribution. Once Social Security collects those taxes, they are used almost exclusively to provide current benefits for today’s Social Security recipients.
While the situation isn’t great as it stands right now, it is fixable. As for what might be required to close the funding gap, the Center for Retirement Research shares:

“…Social Security’s long-run deficit is projected to equal 3.61 percent of covered payroll earnings. That figure means that if payroll taxes were raised immediately by 3.61 percentage points – about 1.8 percentage points each for the employee and the employer – the government could pay scheduled benefits through 2097, with a one-year reserve at the end.”

So, with what could be considered minor changes, promised benefits could be paid through 2097, which is certainly past the life expectancy of anyone age 30 or older today. It’s important to note that this deficit and what’s required to fix it grows with each passing year of congressional inaction.

That said, the potential solution mentioned above does not involve making any other changes to the program, which seems unlikely given how they approached the 1983 Social Security reform.

Using that as our guide, it seems likely that they would take a multifaceted approach, raising payroll tax percentages and the level of earnings subject to payroll taxes, as well as increasing the eligible retirement ages for future retirees.

Finding that balance will obviously require compromise from Washington politicians, which admittedly is no small task.

By no means do we know what the outcome will be in Washington, but even if they don’t make any changes whatsoever to the system, the Social Security Administration estimates that they have enough to pay full benefits until 2033. Beyond that, thanks to inflows from the working public at that time, they could provide estimated benefits at a 77% level thanks to the inflows from the working population.

That’s obviously not ideal, but it’s a long way from the $0 that many people assume to be the case.

Our hope in sharing this data with you isn’t to minimize the significance of this issue, but to show that the situation is manageable compared to the doomsday scenario most people hear about. I hope you find it helpful.

This material is not financial advice or an offer to sell any product and is not a recommendation to buy or sell any particular security. The opinions expressed are those of the Saling Wealth Advisors’ Management Investment Team and are subject to change without notice.

Saling Wealth Advisors (“SWA”) is an independent SEC registered investment advisor. Registration does not imply a certain level of skill or training. This material is provided for informational and educational purposes only. More information about SWA including our advisory services, fees, and objectives can be found in our Form ADV Part 2A, which is available upon request.