Is Social Security Really Broke?

The news is full of attention-grabbing headlines about how Social Security is going broke.  Yet when you get into the details, the headlines may be misleading. 

I asked David Freitag to explain some of the details to understand better what is happening with the Social Security Administration. 

fyi50+: David, is Social Security going broke?

Freitag: As the saying goes, don’t believe everything you read in the newspapers or the internet. It is safe to say that the system does have a funding problem, but it is far from going broke.

fyi50+: How is Social Security funded?

David: A payroll tax funds the Social Security system. You can see this tax on your paycheck as FICA tax, which stands for Federal Insurance Contributions Act. People who work for a company pay 6.2% of their income into the system.  Their employer matches this amount and taxes are paid until the employee’s income reaches the maximum taxable earnings limit. In 2024, the limit is $168,600 per year.

Once your yearly income passes that amount, the Social Security part of the FICA tax is no longer collected.   Self-employed people pay both sides of the tax up to the earnings limit.  Another 1.45% is paid to refund Medicare Part A. However, unlike the Social Security part of the FICA tax, the Medicare portion is paid on all your income. 

This FICA tax, which can only be used for Social Security and Medicare benefits, goes into the Social Security Trust Fund. When Social Security financing was restructured in 1983, income over what was needed to pay benefits was accumulated in the trust fund with the understanding that baby boomers would one day be retiring and starting to collect their benefits for retirement. According to the 2023 Trustees Report to Congress, at the end of 2022, the money in the trust fund was $2.83 trillion.

fyi50+: That is a large number.

Freitag: That is true, but the SSA has started using surplus trust funds to pay promised benefits. In 2022, the trust fund took in $1.222 trillion, but it sent $1.244 trillion out to workers.  

fyi50+: How long can this negative cash flow last?

Freitag: The estimates vary each year, but the current estimate is that in 2033 or 2034, the surplus money in the trust fund will be gone, and the SSA will have to cut benefits between 20% and 23%.  Again, these are estimates and are subject to change all the time.

fyi50+: Wait a second. So, in 2033 or 2034, the benefits could be reduced but not eliminated.

Freitag: That is precisely the point.  The system is not “broke,” but it is under stress.

fyi50+: Has this ever happened before?

Freitag: Yes, in the early 1980s, Social Security was in terrible shape, so the system went through restructuring in 1983. The government developed a more stable funding schedule. The system we have today is based on the funding designed in 1983.

fyi50+: A +/- 20% cut in benefits will not be good news for workers in 2033 or 2034.

Freitag: That is true.  But there is time to fix the funding problem.  However, it will take some critical congressional decision-making to complete the job.

fyi50+: I am sure congressional leaders are discussing this problem.

Freitag: Yes, those discussions are taking place, and there are three emerging details on possible funding solutions.

  • The first would be an increase in the earnings cap.  
  • The second would be an increase in the payroll tax rate of 6.2%.
  • The third would be an increase in the definition of full retirement age.

As a group, these changes would restore the funding of Social Security benefits well into the later part of this century.

fyi50+: How soon might these changes take place?

Freitag: Well, the sooner, the better. The Social Security system is an integral part of the retirement DNA of this country — How we fund it is likely to change, but it is unlikely to go away.

fyi50+: Thanks, David. The information you provide will help many understand the Social Security system. We will have to start letting our elected officials know that solving the funding problem is something to do sooner rather than later. 


David Freitag

David Freitag, an industry veteran in financial services and wealth management, brings a deep passion and unparalleled knowledge of Social Security filing strategies and retirement income planning to his current role as a financial planning consultant for the Advanced Concepts Design Group of Massachusetts Mutual Life Insurance Company (MassMutual). His also holds a Master of Education and Bachelor of Science degrees from the University of Maryland.

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