The vitality of the Social Security system has long been a topic of discussion, and warnings that it will become insolvent are nothing new. But what does such insolvency mean?
The Congressional Research Service (CRS) sheds some light on what the insolvency of Social Security means — and doesn’t mean. In “Social Security: What Would Happen If the Trust Funds Ran Out?” the CRS, while not downplaying the seriousness of insolvency, at the same time offers the solace of reassurance that all would not be lost.
A Sobering Analysis
The CRS report says that the Social Security trustees project that the combined Social Security trust funds — the Federal Old-Age and Survivors Insurance (OASI) Trust Fund and the Federal Disability Insurance (DI) Trust Fund — will be depleted by 2035. By then, the combined trust funds would become insolvent.
The CRS says that between 1995 and 2015, tax revenues to the DI Trust Fund trust fund were relatively flat as a percentage of taxable payroll, whereas expenditures as a share of taxable payroll grew markedly. The increase in expenditures, they say, stemmed largely from the growth in the number of beneficiaries in the program — during that period, the number of disabled worker beneficiaries increased by 113%, from nearly 4.2 million to more than 8.9 million. The CRS notes that the trustees projected in their annual reports for 2012 through 2015 that the DI trust fund would be depleted in late 2016. Due to the imbalance between the fund’s receipts and expenditures, the balance of the DI trust fund fell from $60.2 billion at the start of 2015 to $32.3 billion at the end of the year.
Based on the trustees’ “intermediate” Social Security projections — which reflect their “best estimates” of future demographic and economic trends — the OASI Trust Fund would be depleted in 2034 and the DI trust fund would not be depleted within the long-range 75-year projection period.
On a hypothetical combined basis, the CRS says that the trust funds would become insolvent in 2035. It does include the caveat, however, that those projections are uncertain — like all long-term projections. They estimate that there is a 10% chance that the combined trust funds would become insolvent in 2032 or earlier and a 10% chance that insolvency would occur in 2039 or later.
The Congressional Budget Office (CBO) is even more strident in its assessment. The report notes that using somewhat different assumptions and projection methods, in March 2021 it said that the combined trust funds will become insolvent in 2032.
And if a Social Security trust fund became depleted and current receipts were insufficient to cover current expenditures, there would be more than financial consequences, the report observes. The CRS points out that in that case, there would be a conflict between two federal laws.
To wit: Under the Social Security Act, beneficiaries would still be legally entitled to their full scheduled benefits. However, the Antideficiency Act prohibits government spending in excess of available funds, so the Social Security Administration (SSA) would not have legal authority to pay full Social Security benefits on time.
But What Does Insolvency Mean?
Even if insolvency happens, the trust funds would continue to receive income from payroll taxes and income taxes on benefits — and that would allow some benefits to be paid, says the CRS.
“Some Americans may believe that if the trust funds were depleted, Social Security would be unable to pay benefits at all,” says the CRS. It notes, however, that in 2035 — the first year of projected depletion of the combined Social Security trust funds — the program still is projected to have enough tax revenues to pay about 80% of scheduled benefits. And, it adds, the system still would be able to provide a substantial portion of scheduled benefits after that: 74% by the end of the 75-year projection period in 2096.
Thus, says the CRS, although the trust funds would be insolvent upon depletion because they would be unable to cover 100% of expenditures with incoming tax revenues, “they would not be completely broke and unable to pay any benefits.”
Insolvency could add an element of unpredictability, however. The CRS says that if insolvency delayed the payment schedule, benefit payments could be made as usual — “first to those who receive benefits on the third of the month, then to those on the second Wednesday of the month, and so on, until the remainder of the trust funds’ balance reached zero.” Then, says the CRS, benefits could not be paid until more tax receipts were credited to the trust funds. Once that happened, benefit payments could resume where they stopped when the trust funds ran out. The report says that this cycle “could continue indefinitely” and that payment timing would be unpredictable.
The Bottom Line
“Insolvency does not mean that Social Security will be completely broke and unable to pay any benefits,” according to the CRS.
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