“There’s a hole in the bucket dear Liza, dear Liza! There’s a hole!” — 18th-century folk song
Social Security is the largest federal program, doling out $1.7 trillion in 2025 for retirement and disability payments, bigger than the $900 billion in Medicare and nearly twice the annual defense budget. The problem is that total revenue collected to finance the program was just $1.4 trillion. With most other government outlays, Congress simply borrows the difference, adding to the national debt.
But the peculiar structure of Social Security does not allow deficit financing. The program operates in a closed loop outside the annual budgeting and appropriations process using a dedicated trust fund into which payroll taxes are received and from which benefits are paid. As most Americans surely know, the trust fund is being depleted (along with its Medicare sibling), and the hole in the bucket just got a little larger.
According to the Congressional Budget Office, the government’s official scorekeeper, the Social Security trust fund is now predicted to run dry in 2032, a full year earlier than last year’s estimate. In the absence of Congressional action, current law dictates that retirees will be subjected to an automatic reduction in benefits of 24%, roughly $18,400 for the average couple, in just six years.
It’s hardly as if we had no warning. The budget office and the trustees of Social Security have been waving the red flag for 15 years, to no avail. And we have prior experience. The trust fund ran dry in 1982, prompting the appointment of a bipartisan commission led by Alan Greenspan that hammered out a plan intended to ensure its solvency for the next 75 years. Nothing focuses the mind like a hoard of angry retired voters. Yet while the commission plan expected the program would eventually need another fix by 2063, something went off the rails, and the day of reckoning has advanced by 31 years. How did that happen?
Demographic trends are often singled out as a primary factor in the accelerated depletion of the trust funds. For instance, average life expectancy has steadily increased just as the baby boom generation was stampeding into retirement. However, the 1983 reform panel anticipated the demographic shift reasonably well. After all, they already had a decent estimate of how many Boomers would be around to claim their benefits since the last one was delivered in 1964.
The commission was also fairly accurate in its projection of long term growth in household income, at least in the aggregate. That expected wage growth informed its prediction that income from payroll taxes and interest on the trust fund balance would exceed benefit payments and build a surplus through 2021. At that point, benefits were predicted to exceed income and the fund would begin drawing down through 2063. That would leave plenty of time for members of a future Congress to act, most of whom had yet to be born.
What the reform panel could not anticipate was the dramatic structural shift in the distribution of income growth that eroded the tax base. While they expected higher wages to be broadly shared across the economy, it turned out that most of the income gains accrued disproportionately to the wealthiest households, resulting in a significant increase in the share that escapes taxation to fund Social Security. Congressional Budget Office data shows that average income for the top 20% of U.S. households has grown nearly three times faster than for the median household since 1979.
This matters for a few reasons.
First, the Greenspan reform included a cap on the amount of income subject to payroll taxes for Social Security, currently $184,500 indexed for inflation. Wages above the cap are exempt from Social Security taxes. In 1983, 90% of all earned income was subject to payroll taxes. That share has fallen to 83% as of 2025.
Secondly, payroll taxes apply only to remuneration from employment. Social security tax does not apply to realized capital gains on the sale of assets like stocks and real estate. Capital gains represented less than 5% of household income in 1983 but now make up more than 10% according to IRS data.
Compounding those factors, the Great Recession of 2006 kinked the growth trend in wage income for most workers. It was only in 2015 that the average household recovered to the previous income level in 2000 adjusted for inflation. Payroll taxes can be a highly cyclical revenue source.
And just for good measure, workers today receive a greater share of their compensation in employer-paid benefits like health insurance and retirement plan contributions, which are also not subject to taxation. Untaxed fringe benefits have roughly doubled as a share of total compensation from around 15% in the 1980s to 30% today. Net of employer spiffs, cash compensation subject to payroll taxes has grown much more slowly.
These structural shifts have damaged the solvency of the Social Security trust fund, as well as the Medicare trust. Annual revisions from the Congressional Budget Office have successively advanced the estimated insolvency date from 2041 in its 2007 report to 2032 in its latest update. The Wall Street Journal recently noted that the opportunity for Congress to kick the can is rapidly diminishing, as the new class of U.S. senators who will be elected in the 2026 midterms must face the drop-dead date during their terms.
The 1983 effort gradually raised the full retirement age from 65 to 67 and increased the tax rate, and any fix will likely include some similar considerations. Raising or eliminating the threshold on excluded wages, taxing fringe benefits, additional means testing of benefits and taxing capital gains income are some proposals on the table. There is no magic cure, and action a decade ago would have been much less painful, but delaying another six years would hurt even more. As the saying goes, it’s simple, it just ain’t easy.
Christopher A. Hopkins, CFA, is a co-founder of Apogee Wealth Partners in Chattanooga.