In 2034, the Social Security Trust Fund will run out of money. And unlike a rich kid living off of daddy’s dime, this empty Trust Fund poses a problem. After all, if you are 70 or under today, then you should expect to be alive in 2034. And, if the Trust Fund does run out, you should expect a hit to your wallet. Worried? Then read on.

In this post, I want to first describe what the Social Security Trust Fund is. Then, I want to talk about what happens when it runs out (hint: Millennials, it may not be what you think). Finally, I’ll talk about some policy solutions that can prevent this issue from arising in the first place. After all, the Social Security Trust Fund’s depletion is a problem that we can see coming years away. Which means that we could actually plan ahead, work together, and solve the problem. I almost made it through that last sentence without laughing or crying.

What is the Social Security Trust Fund?

In the U.S., Social Security is a “pay-as-you-go” program. This fact means that benefits for today’s retirees are paid for by today’s workers. That’s why every time that I see my retired parents, before I say anything else, I just yell “You’re Welcome!”

When the amount of money contributed to the program exceeds benefits that need paid out, that money is invested in U.S. Treasury Bonds and held in trust. The money can only be used to pay Social Security benefits and administrative costs. So, when today’s workers don’t contribute enough to Social Security to pay today’s retirees, the Trust Fund can make up the difference. Today, the Trust Fund holds almost $3 trillion dollars. Which, admittedly, sounds like a lot of money.

But, that $3 trillion is about to start going down. The reason is pretty simple. The Baby Boom generation — born between 1946 and 1964 and now aged 74 to 56 — is either retired or poised to retire. That means a whole lot of new beneficiaries collecting benefits from the taxes of fewer and fewer workers. Indeed, the number of workers per beneficiary is projected to drop from 2.9 in 2010 to 2.4 in 2030. As shown below, the cost of Social Security is already exceeding it’s income, and it’s only getting worse. The net effect is that the Trust Fund will likely run out by 2034, although COVID may be pulling that number forward.

Figure 1. Projected Social Security Income and Cost Rates, as a Percentage of Taxable Payroll, 1990-2094

So, what happens if the Trust Fund hits zero? Maybe, not quite what you think.

When the Social Security Trust Fund Hits Zero

Many people think that when the Social Security Trust Fund hits zero, the program ends.  This thinking is especially true for young people. For example, in a recent survey conducted by Nationwide, 44 percent of Millennials thought that they would not get any money from Social Security. Technically, I am a Millennial, and I have one thing to say to those 44 percent. My Millennial compatriots: you basic!

As you learned above, Social Security benefits come from two sources: payments from workers and payments drawn out of the Trust Fund. When the Trust Fund runs out, those two sources become one source — the payments from workers end up having to cover all benefits. And, the current estimates are that those workers will be able to cover about 73 to 79 percent of benefits over the next several decades. So my fellow Millennials, when we retire, the people who are still working will be able to pay at least some of our promised benefits. Which, is why I am always nice to younger people.

Of course, it’s worth noting that this benefit reduction will occur across the board, even for people already receiving benefits. In other words, if you are a 65-year old today and the Trust Fund continues on its current track, when you are 80 you can expect an over 20 percent reduction in Social Security. In other words, all of us, from the older generations to the younger ones, have an incentive to figure this problem out.

Solving Social Security’s Cash Crunch

Like I said at the beginning of this post, this problem is one we can see coming. And all of us can benefit from solving it. But before I talk about how, a quick word about something that often gets in the way of solutions: blame. In this case, it’s tempting to blame a common target — the Baby Boomers. But that kind of blame doesn’t just get in the way of a solution, it is also misplaced.

It is true that the Baby Boomer’s retirement is causing Social Security’s cash crunch. But, it’s also true that Baby Boomers have actually paid more than their fair share for the program. How are these two things both possible? Well, when the program started in the 1930s, society made the decision to pay benefits for retirees born earlier, who hadn’t themselves contributed much to the program. Before you get too mad, remember that many of those retirees survived a Depression and fought in a World War. But, this decision created a large hole in the Trust Fund. And, if that hole was never created, we wouldn’t really be in this mess. So, don’t blame the Baby Boomers — blame their parents who are mostly gone and probably deserved the help anyway.

OK, so no one to blame and we all benefit — let’s solve this thing. One of my personal favorite solutions is to subject all wages to Social Security’s payroll tax. Currently, you only pay Social Security’s payroll tax — the tax that finances older folks benefits — on your first $138,000 of wages. If we eliminated that maximum (and ensured that people paying higher taxes were compensated with slightly higher benefits), it would extend the time until the Trust Fund runs out until 2063. That’s a full thirty extra years.

Ok, so that’s a revenue increase. I hesitate to introduce benefit cuts, because Social Security is so important to low-earners and an equalizer for People of Color. But, let’s say I wanted to compromise. So, I agreed to do something that acts as a benefit cut — like increasing the Social Security Full Retirement Age from 67 to 68, decreasing benefits for any one who doesn’t work longer. This change combined with the tax increase would push the date the Trust Fund runs out all the way out to 2072. Two small changes, a huge improvement in Social Security’s finances.

The truth is, fixing Social Security’s Trust Fund requires making exactly these kinds of choices. (If you want to learn more, you can do your own calculations here.) It requires a little bit of math, and a little bit of compromise — things Americans sort of suck at. Except, we’ve done it before. That’s right, The Trust Fund almost ran out before. It was due to run out in July 1983. Fortunately, people worked together, and passed a law to solve the problem. In April 1983!! So, maybe we shouldn’t hold our breath for a solution anytime soon. But policymakers, mark those calendars for 2033.