CRS report: what would happen if Social Security funds ran out?

A new study by the Congressional Research Service (CRS) contains recent information on when Social Security trust funds are projected to be exhausted, the relevant law that would apply if funds are exhausted, and possible scenarios regarding future Social Security benefit funding.

Background on the Social Security trust funds. Social Security provides retirement, disability, and survivor benefits to qualifying workers and their families. These benefits are funded from two trust funds: the Old-Age and Survivors Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund. The two funds operate separately but are closely linked. CRS’s report generally assumes the merged operations of the OASI and DI trust funds, treating the two funds as if they were one collective OASDI fund.

The trust funds receive income from several sources. Their primary income source is the Social Security payroll tax levied on wages and self-employment income. Social Security-covered employees and employers each pay 6.2% of wages up to the taxable maximum ($113,700 in 2013). The trust funds also receive income from interest on the trust funds’ assets and from the taxation of Social Security benefits.

If the trust funds are not able to pay all of current expenses out of current tax income and accumulated trust fund assets, they are considered to be exhausted or insolvent. In other words, exhaustion or insolvency means that Social Security’s trust funds are unable to pay full benefits on time.

The Social Security Administration’s 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (May 31, 2013) projected trust fund exhaustion in 2033. That report also provided that in 2033, the first year of projected insolvency, the program is projected to have enough income (from taxes) to pay about 77% of scheduled benefits. The percentage of scheduled benefits that could be paid with income (from taxes) would decline to 72% in 2087.

Law that would apply if the trust funds were exhausted. The Social Security Act specifies that benefit payments may be made only from the trust funds (i.e., accumulated trust fund assets). (42 USC 401(h)) Another law, the Antideficiency Act, prohibits government spending in excess of available funds. (31 USC 1341) Consequently, if the Social Security trust funds become insolvent-that is, if current tax income and accumulated assets are not sufficient to pay the benefits to which people are entitled-the law effectively prohibits full Social Security benefits from being paid on time.

The Social Security Act states that every individual who meets program eligibility requirements is entitled to benefits. (42 USC 402; 42 USC 403) In other words, Social Security is an entitlement program, which means that the government is legally obligated to pay Social Security benefits to all those who are eligible for them as set forth in the statute. However, Congress retains the right to modify provisions of the Social Security Act at any time, which could affect the benefits current and future beneficiaries may receive. (42 USC 1304)

If the government fails to pay the benefits stipulated by law, beneficiaries could take legal action. Insolvency would not relieve the government of its obligation to provide benefits.

The Social Security Act does not stipulate what would happen to benefit payments if the trust funds ran out. There is no a specific “fail-safe” provision in case of trust fund exhaustion-for example, a formula for cutting benefits or raising taxes to eliminate annual deficits. As a result, either full benefit checks may be paid on a delayed schedule or reduced benefits would be paid on time.

Possible scenarios regarding future Social Security benefit funding. The CRS discussed various scenarios that could take place in the future regarding Social Security benefit funding.

It then summarized these scenarios as follows: The sooner Congress acts, 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. Prompt action would also allow Congress to gradually phase in changes, rather than abruptly cutting benefits or raising taxes, thus allowing workers to plan in advance for their retirements.

For example, if Congress waits until the moment of insolvency to act, the trust funds’ annual deficits could be eliminated with benefit cuts of about 23% in 2033 that will gradually rise to about 27% by 2087. Congress could also eliminate annual deficits by raising the Social Security payroll tax rate from 12.40% to 16.1% in 2033, then gradually increasing it to 17%. But, if Congress acted today, the benefit cuts or tax increases necessary to restore solvency until 2087 would be about half as large as those needed if Congress waited until the trust funds became insolvent.

References: For FICA (i.e., Social Security) tax, see FTC 2d/FIN ¶ H-4545 ; United States Tax Reporter ¶ 31,114 ; TaxDesk ¶ 541,001 ; TG ¶ 9500 .

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