Last year, Social Security spent $169 billion more on benefits than it took in through taxes. In part, this was the result of the temporary reduction in payroll taxes passed in 2011, and extended for an additional year in 2012, before being allowed to expire on January 1, 2013 as part of the deal to avert the fiscal cliff. However, even though the payroll tax has returned to its full 12.4 percent rate, Social Security is projected to run a shortfall this year of $79 billion.
This does not technically constitute a deficit because Social Security also received $109 billion in interest payments on the bonds in the trust fund and $114 billion in general revenue reimbursements as compensation for the temporary payroll tax reduction passed in 2010 and renewed in 2011. However, even considering those payments, Social Security will run a cash-flow deficit by 2022.
In theory, of course, Social Security is supposed to continue paying benefits by drawing on the Social Security Trust Fund until 2033, after which the fund will be exhausted. At that point, by law, Social Security benefits will have to be cut by approximately 23 percent.
The Trustfund Is Not an Asset
However, in reality, the Social Security Trust Fund is not an asset that can be used to pay benefits. As the Clinton administration’s Fiscal Year 2000 Budget explained it:
These [Trust Fund] balances are available to finance future benefit payments and other Trust Fund expenditures—but only in a bookkeeping sense. …They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits.
Michael D. Tanner is a senior fellow at the Cato Institute, heading research into a variety of domestic policies with particular emphasis on health care reform, welfare policy, and Social Security. His most recent white paper, "Bad Medicine: A Guide to the Real Costs and Consequences of the New Health Care Law," provides a detailed examination of the Patient Protection and Affordable Care Act (Obamacare) and what it means to taxpayers, workers, physicians, and patients.