What Does Social Security Insolvency Mean?

The current controversy over cutting Social Security benefits is driven by a single fact: The Social Security program is projected to be insolvent in little more than a decade unless Congress takes remedial action. But what does insolvency mean for Social Security?

Back in 1935, Social Security was set up to resemble a private pension plan. While the legal niceties are a bit complex, what Americans would see is that they pay taxes into Social Security while working, and in return they qualify for benefits in retirement or if they become disabled. President Franklin Roosevelt established this setup to differentiate Social Security as an “earned benefit” from what we today would refer to as “welfare,” which generally is funded from income taxes. 

Dedicated Social Security taxes, Roosevelt said, “are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.” President Franklin Delano Roosevelt was, if nothing else, a canny politician. Attempts to reduce Social Security are not countered merely with arguments based upon need, but upon the perceived unfairness of cutting benefits that Americans understandably believe they have paid for.

Along with this citizen-level relationship with the system, Social Security’s finances were set up differently than most other government programs. While, say, the Defense Department is funded each year based upon Congress’ perceived needs and priorities, Social Security is legally empowered to pay only the benefits affordable via its dedicated revenue sources—mostly payroll taxes, with a small amount coming from income taxes  levied on retirement benefits—and the balances in Social Security’s retirement and disability trust funds. At the same time, so long as the Social Security trust funds are solvent, the program will automatically pay the benefits to which Americans are entitled without annual approval from Congress.