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Is Social Security Broke?

Reports of Social Security’s imminent demise have been vastly overstated. Even if no changes are made, Social Security will continue to pay full benefits, on time, until 2040.

No. Reports of Social Security’s imminent demise have been vastly overstated. Even if no changes are made, Social Security will continue to pay full benefits, on time, until 2040. After that, the system will have a 25 percent shortfall, not empty coffers. In fact, as long as the Social Security payroll tax continues (6.2 percent of wages, paid by both the employer and employee), the system can never go broke. The challenge for Social Security is to ensure that 100 percent of benefit obligations are paid far into the future.

Social Security’s long-range shortfall presents a significant but manageable problem. According to the 2006 report of the Social Security Trustees, the future shortfall is the equivalent of 2.02 percent of wages. That means that if employers and employees each paid a little over 1 percent in additional payroll tax, Social Security would be in great shape for at least the next 75 years! Of course, there are many other solutions to consider other than raising tax rates, but these figures indicate the relatively modest size of the problem.

If nothing is done to solve the problem, however, it will worsen. Waiting until the problem is upon us isn’t an option, because it would mean huge tax burdens for future generations. To avoid a crisis down the road, we need to act soon. 

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