Each year, the trustees of the Social Security trust funds issue a status report for them.  The news this year was not great.  The reserves for Old-Age and Survivors Insurance are projected to be exhausted in 2033, at which point benefits will have to be reduced to 77% of what is scheduled.  The exhaustion year for OASI is unchanged from the last report, but for Hospital Insurance it comes three years earlier than the last report, also in 2033.  In that year Medicare benefits will be reduced to 89% of scheduled benefits.

The major reason for the deterioration in the financial health of the trust funds, according to the report, was the repeal in January, 2025, of the Windfall Elimination and Government Pension Offset provisions of the Social Security Act.  This action increased benefits for some government workers.  Other factors included historically low levels of fertility and a change in the assumption of the long-term share of Gross Domestic Product that goes to labor compensation (and hence to the trust funds through taxation).

Social Security taxes and benefits were substantially overhauled back in the Reagan administration, which put Social Security tax collections into surplus for more than 25 years. The surplus funds in the trust accounts were invested in special government bonds paying a market rate of interest.  In 2010 the cost of benefits began to outstrip the collection of payroll taxes, so that the interest earned on the bonds had to be tapped for benefits. By 2021 the costs exceeded payroll taxes plus the interest payments, so that the reserves had to be drawn down to meet scheduled benefits.  This process will continue until 2033, when there won’t be sufficient funds to pay promised benefits.

At the end of 2024, there were 60.1 million people receiving OASI benefits at a cost of $1,327.2 billion.  Payroll taxes of $1,105.6 were paid by 183.9 million workers.  In addition to the tax collections, the OASI trust fund had $63.7 billion of interest income on past surpluses and $54.4 billion of taxes on OASI benefits.  Reserves fell from $2,641.5 billion at the end of 2023 to $2,538.3 billion at the end of 2024, a reduction of $103.2 billion.

The report was prepared before the passage of the tax bill signed by President Trump on July 4.  That legislation includes a bonus $6,000 deduction for taxpayers age 65 and older, and is in place of the President’s proposal to make Social Security benefits tax free.  Income tax on benefits accounted for about 4% of OASI income in 2024, and presumably that will now be reduced.

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