There is no Social Security crisis

Social Security Trust Fund Faces Projected Shortfall by 2032, With Options for Revenue Adjustments Under Discussion

Last week, major news outlets reported on the latest projections from the Social Security trustees indicating that the Old-Age and Survivors Insurance Trust Fund is expected to be depleted by 2032 under current law, after which incoming revenues would cover approximately 77 percent of scheduled benefits absent congressional action.

The trustees’ report attributes the projected shortfall to demographic trends, including an aging population that increases the ratio of beneficiaries to workers, lower-than-expected immigration levels that reduce payroll tax contributions relative to benefit claims, and the structure of the payroll tax cap, which currently applies only to the first $184,500 of annual earnings. A February analysis by the Urban Institute estimated the cumulative gap between revenues and outlays at roughly $2.8 trillion for the period 2032 through 2036.

Congress has addressed similar imbalances in prior decades through adjustments to payroll tax rates, the taxable earnings base, or benefit formulas. The Social Security Amendments of 1983, for example, raised the retirement age gradually, increased payroll taxes, and expanded coverage to additional workers. Current law requires that the Old-Age and Survivors Insurance and Disability Insurance funds be treated separately for solvency calculations, though some proposals have considered combining them.

The Bipartisan Policy Center, drawing on Congressional Budget Office and Joint Committee on Taxation estimates, reported that the tax provisions enacted in 2025 are projected to reduce federal revenues by $4.5 trillion over ten years while also reducing spending on Medicaid, the Supplemental Nutrition Assistance Program, and federal student loans by $1.4 trillion over the same period. Separate administration requests have sought increases in defense spending to $1.5 trillion annually.

The Joint Committee on Taxation’s document JCX-45-25 lists the revenue effects of various tax expenditures for fiscal years 2025 through 2029. Among larger items exceeding $100 billion over the period are the exclusion of capital gains on primary residences up to $500,000 for couples and the mortgage interest deduction for first and second homes, together estimated at more than $574 billion. The deduction for qualified business income, enacted in 2017, is estimated at $390 billion. The step-up in basis for inherited assets is estimated by the Joint Committee on Taxation at approximately $73 billion annually.

Proposals to modify the taxation of investment income, such as aligning capital gains rates more closely with ordinary income rates, have been estimated by the Joint Committee on Taxation to generate $1.25 trillion over five years under certain assumptions. These estimates assume no behavioral responses or macroeconomic feedback effects.

Subsidies for tax-advantaged retirement accounts—including 401(k)s, 403(b)s, Keogh plans, and individual retirement accounts—represent the largest single category of tax expenditures in the JCT tabulation, totaling an estimated $2.3 trillion over 2025–2029. These provisions allow deferral of taxation on contributions and earnings within specified limits.

Data from the Federal Reserve’s 2022 Survey of Consumer Finances indicate that 43 percent of families in the bottom three income quartiles held at least one tax-advantaged retirement account, compared with 87 percent of families in the top income quartile and 91.3 percent of families in the top decile. Average balances among account holders also vary by wealth tier. The same survey shows total holdings in such accounts reached $23.8 trillion, with the top 5 percent of households holding approximately $10.15 trillion.

Legislation enacted in recent years has required employers to establish automatic-enrollment retirement plans, though contribution levels remain voluntary and vary with income. Proposals under previous administrations to limit the tax benefits of high-balance accounts, such as capping aggregate contributions or balances at $2 million per household, were not enacted.

The trustees’ projections assume continuation of current benefit formulas, payroll tax rates, and eligibility rules. Any legislative changes to revenues, benefits, or eligibility would alter the projected depletion date.