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Thursday, June 21, 2012

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 2033, according to the 2012 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 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 approximately 75% of 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.

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 $8.6 trillion in present value terms, or 2.67% 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 25% in 2033 that will gradually rise to about 27% by 2086. Congress could also eliminate annual deficits by raising the Social Security payroll tax rate from 12.40% to 16.7% in 2033, then gradually increasing it to 17.1% by 2086. To maintain annual balance after 2086, larger benefit reductions or tax increases would be required.

Prompt action to restore Social Security solvency would be advantageous. The combined trust funds began to run annual cash-flow deficits in 2010. Cash-flow deficits require the redemption of government bonds accumulated in earlier years. 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 2086 would be smaller than those needed if Congress waited until the trust funds became insolvent to act.

Date of Report: June 15, 2012
Number of Pages: 16
Order Number: RL33514
Price: $29.95

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