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Practice Management

What Does Insolvency of the Social Security System Mean?

The vitality of the Social Security system has long been a topic of discussion, and warnings that it will become insolvent are nothing new. But what does such insolvency mean? 

Even if insolvency happens, the trust funds would continue to receive income from payroll taxes and income taxes on benefits — and that would allow some benefits to be paid, says the Congressional Research Service (CRS). 

In 2035 — the first year of projected depletion of the combined Social Security trust funds — the program still is projected to have enough tax revenues to pay about 80% of scheduled benefits. And, the CRS adds, the system still would be able to provide a substantial portion of scheduled benefits after that: 74% by the end of the 75-year projection period in 2096. 

Thus, says the CRS, although the trust funds would be insolvent upon depletion because they would be unable to cover 100% of expenditures with incoming tax revenues, “they would not be completely broke and unable to pay any benefits.”

Insolvency could add an element of unpredictability, however. The CRS says that if insolvency delayed the payment schedule, benefit payments could be made as usual — “first to those who receive benefits on the third of the month, then to those on the second Wednesday of the month, and so on, until the remainder of the trust funds’ balance reached zero.” Then, says the CRS, benefits could not be paid until more tax receipts were credited to the trust funds. Once that happened, benefit payments could resume where they stopped when the trust funds ran out. The report says that this cycle “could continue indefinitely” and that payment timing would be unpredictable.

The Bottom Line

“Insolvency does not mean that Social Security will be completely broke and unable to pay any benefits,” according to the CRS.