Operational changes, staffing reductions, and database access issues at the Social Security Administration have garnered substantial attention in recent weeks. While such changes may affect customer service and the integrity of the agency’s programs, none address the serious fiscal challenges facing Social Security.
A New Administration Brings A New Approach
While the Biden administration focused on expanding SSA’s workforce to improve customer service, the Trump administration and its Department of Government Efficiency have taken a different approach. Initial activities have been directed at addressing perceived fraud risks and database accuracy issues, as well as generating savings through workforce reductions, grants terminations, and full overpayment clawbacks.
Instances of fraud and other types of improper payments at SSA—particularly in the Old-Age and Survivors Insurance program—are modest compared with other federal agencies, per a Government Accountability Office report. That hasn’t stopped allegations that fraud is rampant there, as covered by the Associated Press. Some of those claims are being driven by concerns over Social Security number usage and database upkeep practices involving death records. Access by DOGE to SSA’s systems has also raised privacy concerns because of the extremely sensitive nature of the data.
Prudent fraud investigation, however, shouldn’t fuel the false notion that operational improvements can fix Social Security’s solvency issues. DOGE has yet to uncover program abuses that amount to anything close to the biggest fraud in history, as head Elon Musk previously suggested on X.
With a long-forecasted wave of baby boomer retirements now crashing down on the system, the greatest threat facing Social Security remains the solvency of the trust funds used to pay beneficiaries.
Is Social Security A Retirement Account?
Few programs garner as much enthusiastic support as Social Security, particularly OASI—one of the largest line items in the federal budget. Unfortunately, that spirit is engendered to some extent by a misunderstanding of the nature of the program and its financial operations.
In particular, the program is viewed by some as being tantamount to a traditional retirement savings plan where funds are contributed through payroll taxes, earn interest through the years, and are set aside for a worker’s benefit as a lifetime monthly payment after retirement. While that is not an unreasonable expectation given the dedicated nature of payroll taxes, the reality is more complex.
Social Security is better characterized as a social insurance program that not only provides retirement income but also life and disability insurance. Benefits are based on a formula that considers your earnings history, the age at which you take benefits, and other factors. And not everyone gets back what they’ve contributed, as an Urban Institute report explains. While many will receive more than they paid in, others, particularly those with higher lifetime earnings, can receive less.
How Do The Social Security Trust Funds Work?
To be sure, bookkeeping entries record amounts contributed, but they are not reserved specifically for a worker’s future benefit. Instead, Social Security is funded on a pay-as-you-go basis. The contributions of current workers are the primary source of funds used to pay current beneficiaries. For cash management purposes, Social Security collections are invested daily in special-issue Treasury securities.
Historically, any payroll tax collections not needed to pay beneficiaries have been used to fund other federal spending, with the government leaving behind IOUs when it swept such surpluses.
With Social Security payments now exceeding payroll tax collections and other trust fund earnings, some of those IOUs, in the form of Treasury securities, are being redeemed to pay beneficiaries. In turn, the government must borrow other money from the public to raise the cash needed. As a result, the financial operations of SSA are closely intertwined with the rest of the federal budget.
Treating Social Security balances as interchangeable with other monies collected by the government runs contrary to the impression held by some that there exist overflowing trust funds in the nation’s treasury to pay current and future retirees. But the government defines the term trust fund differently than it is commonly used. Rather than managing a trust fund on behalf of a beneficiary who has an enduring right to the trust’s income, the government owns the assets of the Social Security trust funds and can enact legislation to change program terms at any time.
Will Full Benefits Be Paid In The Decade Ahead?
Given demographic shifts forcing fewer workers to support more retirees, Social Security trust funds—as accounting constructs, not pots of gold—are scheduled under current law to be insufficient to make full payments within the next 10 years. According to a 2024 trustees report, OASI revenues will be enough to pay only 79% of scheduled benefits after its reserves are exhausted in 2033.
Such a benefit reduction would be extremely unpopular. So, the likelihood of a legislative compromise to address the shortfall is high—but the nation’s elected leaders have so far shown little willingness to address the matter with urgency. Delaying reform makes more severe the measures that will be needed to fix the problem. Reform options outlined by the Committee for a Responsible Federal Budget include some combination of revising benefits and eligibility criteria, adjusting payroll taxes, and borrowing from the public to cover the shortfall.
Given the must-pass nature of such legislation, a golden opportunity exists to solve not only for the fiscal challenges facing Social Security but also perhaps to serve as a catalyst to reach a broader agreement on putting the U.S. on a more sustainable fiscal path, a topic explored in depth in a paper I authored for Arnold Ventures last year.
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