Since the 1990s, the issue of the Social Security system's financial stability has been at the forefront of national debate. As the baby boomer generation begins to enter retirement and people live longer, the ranks of those drawing Social Security continues to grow--and will eventually outstrip the number of workers paying into the system. It is said Social Security will eventually go "broke," but that is a misleading analysis of its real difficulties.
Social Security pensions are determined using a formula that considers the lifetime earnings of a person and the age of retirement. These benefits are, strictly speaking, not paid for from a savings fund, but are instead covered by the taxes on existing workers. Social security funds are collected in the form of a tax on wages, half paid by the worker and half by the employer.
That the Social Security Trust Fund, established in 1983, is a savings fund is a misconception. American wage earners do not pay taxes into the fund, only to withdraw them at retirement. Instead, the trust fund is an accounting device for placing any surpluses produced by the Social Security program. These surpluses are invested in government bonds and, as a general rule, all future pension payments will be made either from the returns on those government bonds and/or from the taxes of future workers.
Because the Social Security program is reliant upon the taxes of existing workers, there is the danger of a fiscal imbalance if the number of retirees drawing benefits exceeds the number of workers paying into the system. It is projected that, starting between 2018 to 2020, the program will have to start drawing on the U.S. Treasury Notes accumulated during the surplus years. In the late 2040s or early 2050s, the Treasury securities may be exhausted. Beyond the early 2050s, Social Security will be running a deficit under its current terms.
Even the worst projections for the Social Security program's future deficits indicate that it will still be collecting roughly three-fourths of its required budget. Eventually, the demographic imbalance that led to the program's deficits are projected to right themselves. The problem is serious, but in no way is Social Security in danger of collapse.
The projected deficits could be eliminated by doing one or more of the following: raising the retirement age, borrowing, raising Social Security taxes or cutting Social Security benefits.