How is social security in the US at risk of running out of funding, if every tax payer pays into it?
In: 1004
People are living longer on average, and there are also fewer people having kids for various reasons.
The system was designed with an ever increasing population in mind initially, so that the growing workforce would always feed into the reserves for the aging population. But now the aging population takes more and more from it before they die, meanwhile less is being put in.
The government keeps borrowing from the social security trust fund to help balance the budget but never pays it back.
Social Security was designed to work like a pension fund. It works because more people pay into it than take out. It is paid for with a dedicated Payroll Tax.
But since 2010 the system has been running on a shortfall meaning the systems cash reserves are dropping faster than they can be replenished.
This is mostly because there is a significant aging population in the US right now. As the baby boomers retire it is putting a lot of pressure on the system that will last until they pass.
Much of the social security fund has also been loaned to the government. The US government borrows money from the social security trusts but must pay it back with interest.
Now that the fund is running on a shortfall, it’s calling in those debts and the US government must borrow more money to pay it down adding to the Federal Debt.
Eventually the US government will either have to slash social security benefits, or print/borrow money to keep it going, or worst case kill the program entirely.
But once the aging population stabilizes it will start working again.
There are a few reasons:
1. The earnings limit for tax purposes is $160,200. That means if you make $161k or more per year you only pay taxes into social security for the first $160,200. Then you get a slightly bigger paycheck the rest of the year.
2. About 67 million people are receiving social security benefits with the average retirement check being just over $1,800 a month and disability being just over $1,400 a month. According to SSA, last year about $1.1 trillion was paid into the program while $1.232 trillion was paid out. As time moves forward the program will continue paying out more than it takes in.
3. Current projections show if nothings done to fix this then in 2034 the reserve will be depleted and beneficiaries may see a reduction in benefits as a result.
Two main points: the type of taxes and the way the money is held by the government.
Firstly, a majority of the money going into Social Security is from payroll taxes. Meaning not everyone is paying into it. When politicians say they’re going to cut taxes they literally never mean the average working voter’s income taxes. It’s always some other tax, almost always cutting this tax specifically in addition to whatever else they are cutting; with the last republican president proposing the *total elimination of this tax* ***entirely***. The total elimination of the program’s main means of funding.
Secondly, the money isn’t held in a bank, or any kind of escrow, for you. It’s not *your money*. It’s (two) general fund(s) that goes into bonds that the government has to repay. The government even pays interest on these bonds *because they are a loan from the fund.* What this means is the taxes collected go into a general fund that the government operates on. By promising businesses the above tax cuts they are effectively, but not directly, taking the money out of the fund and removing a way to replenish it.
Add to that the fact that the US has progressively priced out the idea of creating and raising a family for many Americans, resulting in very low working-age population replenishment now and in the potential future, means the funding for social security is being attacked on two fronts: less taxes going to the fund from a smaller number of people earning that taxable income.
That’s before changing the amount of money people are entitled to or the age at which they become entitled to it.
Imagine there are 5 people in my house, they each pay $50 a month into a shared account for bills, coming to $250 a month. This month, bills increase and they are $300. It doesn’t matter that everyone paid, they didn’t pay enough to cover the bills.
Except in the case of social security it’s more like we have a bitcoin millionaire living in one room who uses ten times the electricity as everyone else running his mining rig, but refuses to pay in more than $50 a month because that wouldn’t be fair.
It’s a ponzi scheme. Every tax payer pays for the generation that came before them. In order to buy votes, politicians agree to give people more money out of the programs, than what they have contributed. This means the system depends on an ever increasing population of working age tax payers.
Here’s some math.
The average US social security contributor (including employer contributions) will put about $135k into the system over a 35 year career. (in 2023 dollars)
The average benefit recipient will receive $20k from the system per year. (in 2023 dollars)
Annualized, the total contributions (at 6% interest excluding inflation) are worth about $276k.
Annualized, the total benefit (at 6% interest excluding inflation) is worth $333k.
Contributions < Benefits
Note: Benefits need to be cut by a fifth, or contributions increased by 25% to avoid insolvency.
Because the US government has set the tax rates so that they get less money in taxes than they spend.
If your income is smaller than your expenses, you need to go into debt and borrow money to keep going.
It is different for countries than people, but the basics of money in and money out needing to match stay the same.
Part of the problem is that taxes are unpopular and taxes on people with money are unpopular on the people who help get politicians elected.
Another issue is the persistent idea that there is a point where you can increase the amount of tax revenue by lowering taxes, this may be true in theory in some cases, but certain politicians act as if it is always the case.
Also the IRS needs money to ensure that everyone actually pays their taxes as they should. This is normally not a problem as every dollar spend on the IRS gets you an estimated $12 in taxes at this point. So giving them more money to do their job should be a no-brainer.
Of course giving the IRS money to do its job is deeply unpopular with rich tax cheats.
withdrawal > deposit = -ve balance = runs out
but, that is not how stuff works, in terms of US at least, it is moneterily soveriegn nation.
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