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Friday, February 4, 2011

Social Security: What Would Happen If the Trust Funds Ran Out?

Christine Scott
Specialist in Social Policy

The Social Security trust funds are projected to become exhausted in 2037, according to the 2010 Social Security Trustees Report. If Congress does not act before then, the trust funds would be unable to pay full Social Security benefits on time. If full Social Security benefits could not be paid on time, the lives of millions of people who rely on Social Security could be disrupted. The consequences of waiting to act are also serious. By 2037, the benefit cuts and tax increases required to achieve long-range solvency are projected to be about twice as large as those needed today.

The Social Security Act does not specify what would happen to benefits if the trust funds became insolvent. However, it is clear that full Social Security benefits could not be paid on time because the Antideficiency Act prohibits government spending in excess of available funds. After insolvency, Social Security would continue to receive tax income, from which some benefits could be paid. Either full benefit checks would be paid on a delayed schedule or reduced benefits would be paid on time. In either case, Social Security beneficiaries and qualifying applicants would remain legally entitled to full benefits and could take legal action to claim the balance of their benefits. The legal conflict between benefit entitlement and the Antideficiency Act would need to be resolved either by Congress or by the courts.

Social Security solvency could be restored by cutting Social Security’s spending, increasing its income, or some combination of the two. Over the long range (i.e., over the next 75 years), the Social Security trustees estimate that the trust funds have a shortfall of $5.4 trillion in present value terms, or 1.92% of taxable payroll. The sooner Congress acts to fill this gap, the smaller the changes to Social Security need to be, because earlier changes could be spread to a larger number of workers and beneficiaries over a longer period of time. If Congress waits until the moment of insolvency to act, the trust funds’ annual deficits could be eliminated with benefit cuts of about 22% in 2038 that will gradually rise to about 25% by 2084. Congress could also eliminate annual deficits by raising the Social Security payroll tax rate from 12.40% to 15.91% in 2037, then gradually increasing it to 16.56% by 2084. To maintain annual balance after 2084, larger benefit reductions or tax increases would be required.

Prompt action to restore Social Security solvency would be advantageous. The trustees project that the combined trust funds will run an annual cash-flow deficit in 2010 and 2011, with small annual cash flow surpluses in 2012 through 2014. Beginning in 2015, the combined trust funds will begin to run annual cash-flow deficits again. Cash-flow deficits require the redemption of government bonds accumulated in earlier years. The Disability Insurance (DI) trust fund is already running cash-flow deficits. Cash-flow deficits do not affect Social Security directly, but the redemption of the trust fund bonds puts pressure on the overall federal budget, which is in deficit. Earlier changes would allow workers and beneficiaries time to adjust their retirement plans. Finally, if Congress were to act today, the benefit cuts or tax increases necessary to restore solvency until 2084 would be about half as large as those needed if Congress waited until the trust funds became insolvent to act.

Date of Report: January 25, 2011
Number of Pages: 16
Order Number: RL33514
Price: $29.95

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