Understanding the Social Security Trust Funds

Each year, the U.S. government reports the amount of money in the Social Security trust funds, the amount added or redeemed in a given year and the interest earned.

By the end of 2007, the trust fund reserves are estimated to be $2,237 billion. The Social Security trustees project that these resources will be sufficient to pay full benefits until 2041 - one year later than last year's estimate of 2040. After 2040, revenue from taxes at the current rates will be enough to pay 75% of scheduled benefits in 2041 and 70% of scheduled benefits in 2081.

The projected actuarial deficit over the next 75 years is 1.95% of taxable payroll, a slight improvement over the 2006 estimate of 2.02%. The projected shortfall may be met in a variety of ways as described below.

• Raising or eliminating the cap on taxable earnings. Raising the current cap of $97,500 to cover 90 percent of earnings would cut the 75-year shortfall by about 45 percent.

• Dedicating estate tax revenues above a certain limit to the Social Security trust funds. Current law gradually reduces the estate tax so that by 2009, only estates valued above $3.5 million ($7 million for a couple) will be assessed. Dedicating the tax revenues to Social Security would reduce the shortfall by 30 percent.

• Together, raising the cap on taxable earnings and freezing the estate tax at the 2009 level while dedicating the proceeds to the Social Security trust funds will meet three-fourths of the future shortfall.

Source: ARA Issue Brief, May 2007