As indicated earlier, employees and employers each pay 6.2% (up to a salary limit of $132,900 in 2019) of an employee’s earnings for Social Security; 1.45% of earnings for Medicare. These taxes potentially fund the four categories of Social Security benefits. These current tax payments into Social Security are being dispersed to those receiving benefits now – excess payments remain in Social Security trust funds. There are separate trust funds for retirement and survivors benefits (the Old-Age and Survivors Insurance (OASI) Trust Fund), disability benefits (the Disability Insurance (DI) Trust Fund), and Medicare.
Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the programs. According to the Trustees: “Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing.”
In 2020, Social Security’s total cost is projected to exceed its total income in 2020 for the first time since 1982. Money is withdrawn from the trust funds when current payments into Social Security are less than disbursements. The demographic shifts and aging population in America have created strains in the financing of Social Security programs. Disbursements are expected to continue to exceed program income after 2020. The retirement and survivors benefits (OASI) trust fund is expected to remain solvent until 2034; the disability benefits (DI) trust fund is expected to remain solvent until 2052. There are two different trust funds relating to Medicare; one of those trust funds is projected to be depleted in 2026.
By 2035, it is estimated that payroll taxes collected will be enough to pay only about 75 cents for each dollar of scheduled Social Security benefits. Given that the retirement and survivors benefits trust fund is projected to be depleted by this time, changes will likely have to be made to Social Security retirement benefits – that include how the program is funded, and/or what benefits are paid.
A summary of the financial status of Social Security from the Trustees: www.ssa.gov/OACT/TRSUM/index.html.
CBEI Blog Series: Social Security
Part 1: How it Works and How it is Funded (or not)
Part 2: Who Gets Benefits?
Part 3: How Are Programs Funded?
Part 4: Benefits – How Much Do You Get?
Part 5: Financial Status of Programs
Part 6: The Future
Kevin Bahr is a professor emeritus of finance and chief analyst of the Center for Business and Economic Insight in the Sentry School of Business and Economics at the University of Wisconsin-Stevens Point.