In just 11 years, Social Security’s trust funds could run out of money. The reason may surprise retirees.

Social Security is undoubtedly one of the most essential functions of our government. The approximately $1.4 trillion in benefits that the Social Security Administration (SSA) pays out each year is a lifeline for millions of retired Americans, representing a significant portion of the post-retirement income for most. For others, it’s almost all they have.

When the program was designed, it was intended to be part of a “three-legged stool” along with pensions and personal investments. Of course, most Americans no longer have access to pensions and must now rely on Social Security and disciplined investing throughout their lives. Many earners at the lower end of the income spectrum can’t afford to put money away in a 401(K) and end up relying entirely on the program.

Social Security is on a difficult financial footing

Unfortunately, the SSA is on track to not be able to meet its benefit obligations for the next 11 years. The SSA’s latest report expects the Old Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds — technically separate but often combined for simplicity in forecasting — to be depleted by at the end of 2035. Before we look at why this is happening and what could be done, let’s better understand how Social Security works.

You might think the government takes money out of your paycheck every month as you work and puts it away for later. In reality, Social Security is pay as you go. The money collected each year from the payroll tax immediately funds the benefits paid to current retirees. In essence, today’s workers are paying for today’s retirees. In years past, SSA ran a surplus; the workers paid more than it paid the beneficiaries. The OASDI Trust represents a reserve of funds from previous years of plenty.

That changed in 2010, the first year since the 1980s that tax revenue fell short of spending. Fortunately, the interest the OASDI trust earned bridged the gap. As of 2021, however, that too was brief. Now the trust is shrinking and by the end of 2035 it is predicted to be empty. What happens then?

To be clear, when the OASDI trust is exhausted, SSA is not bankrupt. The program does not close. Instead, SSA can only pay what it brings in. Benefits will be reduced to match the payroll tax revenue generated each year. In 2036, that will mean a 17% reduction.

One reason stands out as the cause of social security shortfalls

So why is there a shortage? What causes the deficit? While the answer is multi-faceted — this is a complex issue — at the end of the day, it’s because the delicate balance between healthy workers paying into the system and retirees taking from the system has been thrown out.

Most people point to advances in medicine and increased life expectancy. While this will certainly have an effect, it’s not really the main driver. The real culprit is the declining national birthrate.

People are having fewer children. It started with the Baby Boomer generation — a generation so named because the birth rate that created it was skyrocketing — who had far fewer children than their parents had. The trend continued, and each successive generation followed suit. Now, as baby boomers leave the workforce and enter retirement, there is an increase in retirees without enough workers to match; the ratio of workers to pensioners is shrinking.

Interestingly, the SSA report assumes that there will be a slight increase in the birth rate in the coming years. Unfortunately, it will not be enough to fundamentally change this imbalance in the future. Fortunately, there are other factors at play here, though. Immigration is a net positive for SSA because immigrants tend to be young and productive workers. Despite the SSA’s assumption that there will be a net increase in immigrants to the U.S. in the future, it still won’t be enough to fully close the gap according to its estimates.

Of course, these projections aren’t infallible — they’re based on a series of best guesses about the future — but they’re unlikely to be too far off. Unfortunately, the only way out is through meaningful legislation. Congress has done this in the past; I hope he can do it again.