How Social Security Is FundedMost people know that employees and employers pay Federal Insurance Contribution Act (FICA) taxes as payroll deductions. The FICA tax rate for 2021 and 2022 was a 12.4 percent split between the employee and employer. But where does this pool of money go once the government receives it?
The Social Security Trust Fund holds Social Security payments until the Treasury Department pays them out. But these funds don't sit in a pool waiting to be spent. By law, income from the trust must be invested daily. Moreover, the investment must be in securities that guarantee both principal and interest.
All securities held by the trust must be “special issues” of the U.S. Treasury. In addition, the Social Security Trust Fund holds marketable Treasury securities. These are also available to the general public.
They are different from marketable securities. The Social Security Fund doesn't want to purchase marketable securities because they are subject to the open market and may suffer loss or gain if sold before maturity.
Since these are U.S. Treasury securities, it is loaning the Social Security Fund to the federal government.
Social Security Projected ShortfallSince Social Security’s inception in 1935, the government has always made payments in a timely and complete manner. In 2021, 65 million Americans received monthly Social Security benefits. This included nine out of 10 Americans aged 65 or older. But the program’s future is in jeopardy.
Social Security Trustees' RecommendationsThe Social Security Board of Trustees has proposed a couple of solutions to the crisis. First, they recommend the "immediate reduction of benefits by about 13 percent." Instead of a deduction in benefits, they propose a payroll tax rate increase, from the current 12.4 percent to 14.4 percent.
Demographics Contribute to Social Security ShortfallNoted as the “gray tsunami," according to the U.S. Census Bureau, baby boomers make up 69.6 million people between the ages of 58 and 76. In 2022, that’s the second-largest group in the United States. By 2030, all baby boomers will be 65 or over. And one in every five Americans will be of retirement age.
Since Social Security is a pay-as-you-go benefit, millennials aren't exactly socking away funds through their FICA. "Pay as you go" refers to receipts and accumulated surplus used to pay out benefits.
Although there was an uptick in births in 2006, to 4 million, the current birthrate is 3.66 million. This means that by 2034, the U.S. Census predicts there will be more Americans over 65 than are born each year. Indeed, immigration will take over population growth, and natural growth will decline.
Retirees a Powerful ConstituencyAccording to an AARP survey, 93 percent of Republicans, 99 percent of Democrats, and 92 percent of independents perceive Social Security as an essential program. But despite this support, 57 percent of Americans don't feel confident about the future of Social Security.
Seniors constitute a significant voting bloc, and they go to the polls. In 2018, 64 percent of Americans 65 or older voted, while only 37 percent of Americans aged 25–34 voted.
The shortfall projected by the Social Security Board of Trustees hits home to a large population. So it will be interesting to see the reaction of the “gray tsunami" in the voting booth.