Why Social Security may soon run out of money


Less than half of Americans think Social Security will be able to pay them a benefit when they retire, according to a recent Quinnipiac Poll.

This is particularly problematic, given that some 57% of retirees say Social Security is a major source of retirement income, far surpassing IRAs, 401(k), and other work-sponsored retirement plans.

In 2020 alone, $1 trillion in social security benefits will be paid to about 65 million people.

Since 2010, however, the Social Security payroll tax has not been enough to cover the payments of the massive baby boomer generation that has begun to retire.

“Social Security faces a big mismatch between the income it is supposed to collect and the benefits that need to be paid,” said Gopi Shah, deputy director and senior fellow at the Stanford Institute for Economic Policy Research. “In 2020, we pay more in benefits than we receive in income.”

Experts and politicians have warned that the program is very close to a point where it will not be able to pay the promised retirement benefits.

How Social Security invests its money

Think of social security as a pay-as-you-go program. The benefits paid today come mainly from payroll taxes collected from today’s workers.

Social Security is financed by a dedicated payroll tax. In 2021, every working American pays 6.2% from their salary to the government on whatever they earn up to $142,800. Employers match this amount, or if you’re self-employed, you pay 12.4% into the Social Security trust fund.

All payroll taxes and other sources of Social Security revenue are deposited into this fund, and all benefits and administrative expenses are paid from this fund.

For more than 30 years, Social Security was full of money. He received more in payroll taxes and other income than he paid out in benefits and expenses.

And the money didn’t stay there.

The fund’s income is invested in Interest-bearing Treasury securitiesyielding an average interest rate of 2.5% so far this year. From 2020, the trust fund is up to $2.9 trillion.

“U.S. Treasury securities are considered the safest type of asset to back any claim you have, said Gary Burtless, senior research fellow in economic studies at the Brookings Institution. “They are held in an extremely safe, albeit low yielding type of investment.”

Will Social Security run out of money?

For the past decade, The Social Security cash flow is negativemeaning that the agency does not raise enough money through taxes to cover what it pays out to beneficiaries.

“The trust fund is very close to its all-time high in terms of dollars. It’s not near a high in terms of the number of years of benefit payments we can afford to spend on the trust fund. “, said Burtless.

In 2016, the deficit of $75 billion was covered by interest earned on the Trust Fund. In 2019, interest covered almost $81 billion benefit payments.

But from 2021, interest will not be enough to cover the shortfall. Instead, Social Security will have to start tapping into the trust fund himself to help pay for benefits. And even this fund will not last forever.

Experts predict that reserves could sold out by 2035in which case Social Security would only be able to pay about 79% of the promised benefits.

The Social Security Administration declined to give an interview.

“The reality is that every dollar invested in Social Security today goes immediately back to current retirees. It never has the opportunity to generate a positive rate of return over time,” said analyst Rachel Greszler. senior policy officer at the Heritage Foundation, a conservative think tank.

“It has really negative consequences if you look at decades without being able to invest the money set aside,” she added. “When you look at retirement programs, about two-thirds of the assets in them are actually returns on investment. And so you’re depriving workers of that opportunity.”

The global pandemic has further complicated matters.

Massive unemployment, recession, reduced incomes and lower interest rates thanks to the Fed could accelerate the erosion of the fund.

Data from the Wharton School at the University of Pennsylvania estimates the fund could run out as early as 2032. And the Bipartisan Policy Center, a DC think tank, says reservations could be exhausted by 2028.

That doesn’t mean Social Security will be completely out of money, but it does mean that it will only be able to pay a portion of the promised benefits.

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