There’s a lot of uncertainty around Social Security funding, with many Americans fearing that the system will run out of money in their lifetime. While the Social Security trust fund is facing a shortfall, that doesn’t mean recipients will lose out on all their benefits.
To help clear things up, “Marketplace Morning Report” host Sabri Ben-Achour spoke with Monique Morrissey, a senior economist at the Economic Policy Institute about what the shortfall actually means. The following is an edited transcript of their conversation.
Sabri Ben-Achour: Right now, how does Social Security pay for itself? Remind us.
Monique Morrissey: Well, about 91% of Social Security outlays, so what they’re spending on benefits, comes directly from taxes on work — on workers — and employers pay the same amount. And that money goes into Social Security and gets spent immediately out for benefits.
Ben-Achour: There is also the Social Security trust fund. That’s different, how?
Morrissey: Yeah. So, the trust fund has always been there. I mean, you do need to have an account so that you can bring in money and pay it out, just like a checking account. But what happened is we had a big bulge of births — the famous baby boomer bulge after World War II. So, we had an unusual number of people that were working for a while and that built up the trust fund, and then an unusual number of people that are now retiring. So now we are drawing down that surplus. But the problem is that our long-term costs now slightly exceed our income.
Ben-Achour: OK, so I think one area where people get confused is when we talk about Social Security running out of money, it sounds like it’ll just have zero and nobody will get anything. But that’s not quite how it works, right?
Morrissey: Yeah, no, absolutely not it. Social Security is, in fact, not running out of money. People think it is. What is going to happen is that the trust fund around 2032 is going to be drawn down. At that point, we’ll still have enough money to pay for maybe four-fifths of promised benefits. So, people will see like an immediate cut to their benefits. But it’ll be a haircut; it won’t be zero.
Ben-Achour: Right. So, our buffer, our savings, from back when all the baby boomers were booming, that’s going to run down, and we’re going to have a hole in the budget. But it’s not that the whole thing goes away. So, what will happen, or what would need to happen to fix this?
Morrissey: Well, we would need to raise the payroll tax rate by about two percentage points on both sides, so employers and employees would each go from paying 6.2% of earnings to 8.2% of earnings. Another way to do it would be to lift the cap on taxable earnings. So right now, earnings above $184,500 are not taxed, and so the most popular way to close that gap would be millionaires and billionaires pay the same amount into Social Security as ordinary workers are. That’s still not enough to completely close the gap, so it would have to be some combination of raising taxes on ordinary workers and raising taxes on the wealthy.