This week the Board of Trustees of the Social Security program released its annual report on the program’s finances, finding that its trust fund is set to become insolvent in 2034, a year earlier than had been previously estimated.
But what does that mean? What happens when the trust fund reaches zero?
The short answer is, “Nobody knows.” The slightly longer answer is, “It is up to Congress.” The most likely answer is, “Nothing.”
Created in 1939, the Social Security trust fund is largely an accounting fiction. Until 2010, the Social Security system took in more payroll tax revenue every year than it paid out in Social Security benefits. This annual surplus was then “invested” in special issue U.S. Treasury bonds.
These paper IOUs are not real assets. They cannot be traded on any market and can only be redeemed by the federal government. In reality, the excess payroll tax revenue from the Social Security system has always just helped reduce the overall amount of debt the federal government has had to borrow from the public.
But as noted above, since 2010 the Social Security system has been paying out more in benefits than it takes in in payroll taxes. This means the system has been drawing down on the accumulated balance of special issue bonds in the trust fund ever since. And now the Board of Trustees estimates that balance will reach zero by 2034.
At that point, two federal laws are set to interact in a way that, in theory, would cause a 21% cut in all Social Security benefits.
The Social Security Act obligates the federal government to pay people the Social Security benefits they are entitled to under the law. But the Antideficiency Act prohibits federal agencies from spending money “in excess of an appropriation.”
So, if Congress does nothing to authorize more spending by the Social Security system starting in 2034, then the Social Security program will have to start cutting benefits by 21%. And there is no guidance for how it should do so. Should everyone get the same 21% cut? Should everyone get the same payment, with larger beneficiaries taking a cut large enough to offset the 21% for everyone? There is no guide! The Social Security Administration could choose any of them!
But that is unlikely to happen. What is much more likely to happen is that Congress will just appropriate the money needed to make the system whole from general funds, which is essentially what has been happening anyway since the system began spending more than it took in in 2010.
