Social Security’s Funding Crisis Has Arrived

The Social Security Trust Fund has done quite well in recent years, due to the postwar babies’ surge into the labor force in the last decades of the 20th century while retirees from the low-birth rate Great Depression years were drawing relatively few benefits. The combination of these two forces pushed the Social Security Trust Fund balance from about zero in 1980 to $2.9 trillion today. But now, the coronavirus pandemic threatens to undo all those gains, and without swift action by the government a new crisis may be at hand.

The fund’s Trustees noted in an April report that net inflows into the Trust Fund will turn negative next year, commencing a demise that will see the Trust Fund go broke in 2035. Then, payroll taxes will cover only 79% of promised retiree benefits. Here’s the troubling part: “The projections and analyses in this year’s report do not reflect the potential effects of the Covid-19 pandemic on the Social Security program,” the Trustees stated in the annual report. Clearly, benefits will increase as more workers retire early or claim disability while payroll taxes swoon with the drop in employment.

Social Security is not like a cash-value life insurance policy in which an individual’s premiums and interest earned on them are eventually paid out to the insured or in death benefits. Instead, Social Security transfers the payroll taxes of employees and employers to retirees, plus interest.

The huge net inflows of recent years masked the vast expansion of Social Security payouts since World War II that were not actuarially matched by offsetting payroll taxes. That removed any semblance of a savings plan and shifted Social Security to a family welfare scheme. Payments are made to many who aren’t paying payroll taxes, including non-working spouses, widows and children. Also, originally, annual retiree benefits were 17.5% of earnings in the last five years of work but have reached 33% of retiree incomes, on average.