What You Need To Know About Social Security’s Funding

Recent headlines might make you nervous about whether you’ll receive your Social Security benefits. For example, Elon Musk recently called Social Security “the biggest Ponzi scheme of all time.”

The annual Social Security Trustees Report might also trigger anxiety, as recent results don’t seem very positive: The 2024 report stated that the Social Security Trust Fund is projected to run out of money by the year 2035, which is just 10 years away.

It’s always best to get the facts, so here’s an overview of how Social Security is funded.

Social Security Is Largely A Pay-As-You-Go System

Every month, workers pay FICA taxes to Social Security and Medicare and their employers match these taxes. These taxes pay for Social Security and Medicare benefits to existing retirees and beneficiaries.

Workers today pay these taxes with the expectation that in the future, they’ll become eligible for Social Security and Medicare benefits and that future workers will continue to pay their FICA taxes to pay for the benefits of future retirees and beneficiaries.

These FICA taxes fund roughly 75% to 80% of Social Security retirement and disability benefits for current retirees and beneficiaries; the exact amount can fluctuate each year. Supplemental sources of funding to make up the balance are the Social Security Trust Funds for retirement and disability benefits, which fund roughly 20% to 25% of Social Security benefits each year.

What Happens If The Social Security Trust Funds Run Out?

According to the 2024 Social Security Trustees Report, the Social Security retirement and disability trust funds are projected to be exhausted by 2035. At that time, the FICA taxes paid by workers are projected to fund only about 83% of total benefits paid for Social Security retirement and disability. This percentage is projected to decline in subsequent decades.

The main reason for this projected shortfall is that FICA taxes collected in future years won’t be sufficient to pay for future benefits to retirees and beneficiaries. This is due to the increasing longevity of retirees and the insufficient growth in the number of future workers paying FICA taxes.

The fixes are easy to understand but hard for Congress to enact politically: Either benefits need to be reduced, FICA taxes need to be increased, or they need to enact some combination of the two. Increasing the number of workers through immigration would also help, as those workers would be paying FICA taxes, but again that would be difficult politically in today’s environment.

If Congress doesn’t act to prevent the trust funds from becoming exhausted or otherwise fix the program, only about 83% of benefits would be paid to retirees and beneficiaries 10 years from now. This would be an unprecedented situation, so it’s not clear how exactly how benefits would be reduced.

While a 17% benefit reduction would certainly be bad news, you won’t get nothing as some people believe, and Social Security would not be bankrupt.

If you’re really convinced that your Social Security benefits will be cut in the future, you can build that into your financial plans. For instance, if you’re still working, you could save more today to make up for possible Social Security benefit reductions in the future. And if you’re retired, you might adjust your budget to prepare for future cuts in your benefits.

Social Security Is Not A Ponzi Scheme

It’s important that you know there are critical differences between Ponzi schemes and Social Security. Ponzi schemes are illegal acts whose intention is to defraud investors and enrich the perpetrators of the scheme. Early investors pay into the scheme, and their returns are paid by later investors, who typically never get any money back. Ponzi schemes enrich the fraudsters, whereas Social Security benefits are paid to American retirees and beneficiaries.

Investors in Ponzi schemes usually expect to withdraw all their money within a short period of time. On the other hand, workers pay Social Security taxes for decades, with the expectation that they’ll receive monthly benefits for a few more decades. They don’t expect to withdraw the taxes they paid all at once.

Ponzi schemes also usually collapse after a few years, whereas Social Security has been operating for 90 years—since 1935.

There is one similarity between Ponzi schemes and Social Security that accusers exploit to undermine confidence in Social Security. With Social Security, benefits for the current generation of retires and beneficiaries are paid by the current generation of workers; this feature is superficially similar to Ponzi schemes, where the returns of early investors are paid by later investors.

However, there are critical differences that make the Ponzi accusation inappropriate: There are no perpetrators getting rich from Social Security, unlike Ponzi schemes, which usually collapse after a few years. Since Social Security has been operating since 1935, it’s reasonable to expect that future workers who continue to pay their Social Security taxes will be able to draw benefits after they retire.

Social Security Continues An Ancient Practice

Since time began, active members of a community took care of their vulnerable members and their elders, with the expectation that they’d also be taken care of when they became the elders. Social Security is really a formal way of institutionalizing this ancient, humane practice.

Learn the facts, don’t fall for misconceptions. And here’s more step you can take: Let your Congressional representatives know that you expect them to work on fixing Social Security’s funding challenges. It’s a fundamental benefit we should all expect to continue receiving.