For the first time in decades, both the Social Security Trustees and the Congressional Budget Office project the retirement Trust Fund to be exhausted within ten years.
Today’s rising interest rates, and the worst inflation in 40 years is contributing to this challenge. In 2022, higher inflation resulted in an 8.7% cost-of-living adjustment, Social Security’s highest since 1981.
“This was not a windfall for seniors,” said House Ways and Means Chairman Jason Smith, Republican from Missouri, during an April 26 Ways and Means Social Security Subcommittee hearing on the future solvency of the benefit program. “It was needed to keep up with prices. Unfortunately, that high COLA has also resulted in many lower income seniors paying taxes on their benefits for the first time. Perhaps, this is an issue this committee could further examine.”
In the most recent Social Security Trustees report, the date the retirement trust fund hits insolvency moved up one year earlier. “This challenge is not getting easier,” said Smith.
According to the Congressional Research Service (CRS), once asset reserves are depleted, barring any congressional action, the program can pay out in benefits only the amount it receives from income tax revenues. The trustees project that in 2034—the projected date of combined trust fund depletion—tax revenues will be sufficient to pay about 80% of scheduled benefits. The percentage of benefits supported by revenues from payroll taxes and the taxation of Social Security benefits will gradually decrease to about 74% by 2097.
In the Congressional Budget Office’s projections, the OASI trust fund is exhausted in fiscal year 2032, and the DI trust fund is exhausted in 2050. If the two trust funds were combined, they would be exhausted in fiscal year 2033. Economic growth is a key source of uncertainty in these projections. “If the economy grew faster than projected, annual revenues would be greater and the trust funds would be exhausted later than projected, stated CBO Director Phillip L. Swagel.
CBO projects that if Social Security paid benefits as scheduled, spending on the program would increase from 5.2% of GDP in 2023 to 7.2% in 2097. Trust fund balances would be sufficient to pay scheduled benefits through 2097 if payroll tax rates were increased immediately and permanently by about 5.2 percentage points (before accounting for the effects of such changes on the economy).
Such an increase would boost payroll taxes from 12.4% to 17.6%, a relative rise of 42%. Alternatively, a corresponding reduction in benefits of 38% would be sufficient to pay scheduled benefits.
CRS’ projections of the amount by which Social Security’s spending exceeds its revenues over the long term are subject to considerable uncertainty, conceded Barry F. Huston, an Analyst in Social Policy at CRS.
Subcommittee Chairman Drew Ferguson, Republican of Georgia, called the future solvency of Social Security “a serious problem that deserves serious attention from this Subcommittee. We have a responsibility to protect this program for both current and future beneficiaries,” he added.
For more information about payroll taxes, see Checkpoint’s Federal Tax Coordinator ¶H-4545.
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