Some common American worries are gaining weight, getting wrinkles, and wondering whether Social Security will go bankrupt. According to a 2017 Nationwide Retirement Institute survey, 78% of pre-retirees report being worried “about the Social Security program running out of funding in my lifetime.”
If you’re among those wondering how safe Social Security is, you’ll be happy to learn that the program is healthier than you might think — at least for now.
The Social Security trust fund
Before looking at how safe Social Security is, let’s review how it works. Social Security is funded by taxes taken from American’s earnings. Workers get 6.2% of their wages withheld as a Social Security tax. Employers cough up a corresponding 6.2%, for a total 12.4% tax on earnings. (Those who are self-employed have to pay both the employer and employee portions, forking over the entire 12.4% on their own.)
For a long time, there has been more money coming in to Social Security than going out, with surplus funds going into “the Social Security trust fund.” That trust fund encompasses two funds: The Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. Managed by the Department of the Treasury, they permit the U.S. government to hold assets collected and keep track of inflows and outflows. There’s a board of trustees who watch over the trust funds and report to Congress annually on their condition. By law, funds are spent only on benefits and administration, and assets in the funds are invested only in securities guaranteed by the U.S. government. These investments are structured so that they never lose value. They generate interest that can be used to pay benefits and they can be redeemed or sold over time.
Some people have mischaracterized the process, suggesting that the government is borrowing from, or “raiding” the Social Security trust fund. To help explain why that’s not fair, consider this: If someone invests in U.S. bonds, they’re giving the government money, and the government is promising to pay back their investment at a certain time (when the bond “matures”) and to pay interest. The Social Security trust fund, like someone who buys a bond, is simply investing money and receiving interest along the way.
Social Security isn’t about to go broke
Another common misconception about Social Security is that it’s going broke soon, and future retirees shouldn’t expect any checks from it. That’s not likely to happen, but the program does face some challenges.
Ever since Social Security was created, there have been more Social-Security-tax-paying workers than beneficiaries, and that has kept the system flush with funds. But as people have been having fewer children and living longer, the contributing-workers-to-beneficiaries ratio has been falling. In 1950, the ratio was 16.5, with about 48 million workers supporting close to 3 million beneficiaries. As of 2013, it was just 2.8 — and it’s expected to hit 2.1 by 2035.
The Social Security trust funds have been running a surplus in every year since 1984 — meaning that they took in more money than they paid out — but the surpluses have been shrinking and are likely to stop around 2020. Social Security is not a goner then, though. At that point, the system can rely on incoming interest payments to make up the funding deficit — for a while. According to several government estimates, Social Security funds are likely to see their reserves run dry between 2033 and 2037 if no changes are made. If…