Social Security System Faces Serious Cutbacks It Is Already late for Effective Solutions
Social Security System Faces Serious Cutbacks It Is Already late for Effective Solutions
Market Commentary as of July 2026
In This Issue
The Social Security System’s pending financial wreck: You may have heard that the Social Security System’s worst, permanent crisis is only six years ahead. At that point, and every year thereafter, the System’s income from the FICA payroll tax will fund only about 3/4 of its annual benefits payouts. But the back-story is, the System’s Trust Fund was drained of its accumulated assets, starting in 1970, when the System’s FICA tax collections began being siphoned into the general US Government budget, every month, every year, every decade. We examine the problem and a number of proposed maneuvers. And we inject our own long-term, high-impact proposal. There are, of course, no quick fixes.
Gold Update: The month of January 2026 delivered a 25% continuation of gold’s 2025 and 2024 spectacular price increases. But on the first trading day of February, gold’s price began a see-sawing, 17%, five-month backtrack.
A History of Social Security’s Unnecessary Financial Failure
In the early years after creation in 1937, the Social Security System’s original funding format was sound. In fact, it was designed to operate similar to the pension plans sponsored and operated by America’s largest corporations. Its benefit formula was designed to allow low-income people to retire at age 65, when they previously could not afford to do so because of their low earnings and general lack of savings.
The System’s monthly benefit has always aimed to provide post-retirement, lifetime replacement of an individual’s “career-average” monthly pay. Throughout its history, the System’s benefit formula is heavily tilted toward the lowest-paid 40 percent of the private sector workforce, while the higher income taxpayers receive a much lower, partial replacement of their pre-retirement income.
Changing population demographics have gradually painted the System into a corner. Early on, after World War II, the System got a boost in its future, as the so-called “baby boom” occurred. So, in its early decades, the System’s long-term financial future was increasingly healthy. The monthly benefit payments began at age 65, but in 1937, life expectancy at birth was just over age 61 for males, 66 for females. Today, life expectancy is age 79, while the System’s full monthly benefit begins at age 67. Largely because of the short life expectancy in 1937, the first few decades of the System Trust Fund’s cash accumulation were robust….FICA tax income was well above the amount of payouts. The System’s Trust Fund held lots of investment money in US Treasury notes.
The System’s financing source was (and is) a payroll (“FICA”) tax, assessed on every paycheck, up to a certain maximum annual pay. In the early years, the FICA tax was 2%, on annual pay up to $3,000. For 2026, the combined employer/employee tax is 12.4%, on pay up to $184,500.
The Breakpoint
In 1969, when the System was 32 years old, President Lyndon Johnson faced a $36 billion general government budget deficit. It was politically unacceptable. (Back then, that was a huge number.) It would cause his opponents in Congress to hack away at his signature Great Society “guns and butter” programs, because the Viet Nam war was increasingly costly in both lost lives and budget deficits. Johnson became mired-up in it.
Meanwhile, the Social Security Trust Fund was cruising along with annual surpluses. Johnson’s long experience as a senior member of Congress had taught him how to arrange budget-finagled solutions. He knew that the Social Security System was a “cash cow” and that the future would make it more so. Why build up that surplus? he reasoned. We need that money (in the Trust Fund) to go to work! So, he proposed to dump the entire amount of payroll tax collections and benefit payments directly into the general government budget, rather than continuing to operate the System’s Trust Fund independently. Presto: that big 1970 deficit would become a $3 billion budget surplus!
But many members of Congress were loudly opposed…. the Trust was a sacred entity, they said. So, President Johnson “fixed” that obstacle. He arranged for the Trust Fund to continue as anaccounting entity. The re-directed FICA tax revenues and the benefits payouts that the System was no longer handling would be accounted for as if they were operating inside the Trust Fund. But, beginning in 1970, the Social Security Trust Fund’s operations became… and remain… an accounting system, not an operating entity.
Mission accomplished. And because, in 1970, the System’s future was forecasted to continue being a cash cow, the Congress had good reason to believe that the government’s “deficit spending” could cease or at least be greatly curtailed. All political hands were pleased, even though the burdens of Viet Nam caused President Johnson to shock the nation by declining to stand for re-election in 1970. Note: 18 years later, it is widely recognized that the last federal budget surpluses occurred during the Clinton Administration, 1998 through 2001. The Social Security System’s “net cash income” in those years essentially made those surpluses possible.
“Moment of Default”: when no Treasury IOUs are left in the System’s accounting office. Now predicted to be 2032.
Bottom Line: Since 1970, the Social Security System Owns No Cash, or Marketable Investments
Summary: Here is how the System Trust Fund has worked since 1970: (A) FICA tax collections and benefit payouts are commingled with the rest of the US Government’s annual operations. (B) The US Treasury has been issuing special, un-marketable notes (often called “IOUs”) to the Social Security Trust Fund. The total of IOUs represents the difference between FICA tax collected minus benefits paid.
Beginning in 2021, FICA tax collections became less than the amount of System benefits payouts, i.e., the System is now already running annual cash deficits. So, since 2021, the US Treasury has been drawing down its Social Security IOUs, rather than issuing more of them.
End of story: In 2032, there will be no Treasury IOUs left in the System’s accounting office. That event is being described as the System’s “moment of default”. It’s not, really. The System’s operations are, and have been, buried in general government operations, so the reported total annual budget deficits of the US Government (recently around $2 trillion) already include Social Security’s current operating deficits.
Who is Serious About “Solutions”?
The Peter G. Peterson Foundation was established in 2008 with a $1 billion capital contribution. Its mission is “preserving the American Dream for the next generation”. From the beginning, its focus was on the Federal Government’s “unsustainable level of debt” that had accumulated and has continued to grow exponentially… and more so, since the time of the Peterson Foundation’s creation.
The Foundation’s website, among its many other projects, contains a comprehensive examination of the Social Security System’s funding crisis and possible actions to reduce, or resolve the problem. Here, we will review the Peterson Foundation’s collection of knowledgeable people’s ideas that will help to lead the System out of its “accounting crisis” slated to occur at the end of 2032. We will also introduce our own recommendations for a fundamental change that will make the System affordable (over time, of course).
The Scene
Social Security retirement benefits are paid monthly for life (and, after death, if there is a surviving spouse, 50% of the benefit continues). Every year, the amount of the monthly benefit is adjusted for the prior year’s inflation increase.
Everyone earning a paycheck pays the FICA tax… up to a maximum pay “cap” which increases each year to reflect increases in national pay levels. The combined employer/employee FICA tax has been 12.4% since 1990. This year, the taxable cap is $184,500.
Proposed Tweaks and Partial Fixes
The Peterson Foundation’s examination of possible “Policy Options” that would: (A) increase FICA tax revenue and/or (B) reduce benefit payouts. The recommendations (that were made by sources outside of the Peterson Foundation) are:
Increase the System’s payroll tax rate. The FICA tax rate is 12.4% of covered pay… half of which is paid by each person’s employer. To fix the shortfall, the tax rate would have to be 16.65% (an increase of one-third).
Increase, or eliminate the annual tax “cap”, which would only impact high earners… roughly, the top 10%…. they would be paying more tax than they take out in benefits.
Adjust benefit amounts: All proposals in this category would significantly reduce benefits to high income-earners. One proposal suggests “a uniform, across-the-board benefit amount”,such as 150% of the Federal Poverty Level (annually adjusted); clearly, this idea is the most radical, because it “de-links” the relationship between a person’s benefit amount and their career pay.
Substitute the existing benefit indexing formula with a “chained CPI” indexing formula, which is a more accurate measure of actual inflation.
Gradually increase the retirement age by two months per year, until it reaches age 70 (from 67 now).
Require Social Security coverage of all state and local government employees. (About one-quarter of them are not now covered by the System.)
Our Recommendations: on top of any adopted ‘Policy Option(s)’ discussed above.
The Peterson Foundation’s list fails to suggest what we consider to be the single most impactful positive possible change, over, say, rolling 5-year periods in the future. The System should re-visit the approach proposed by President George W. Bush in early 2005. He strongly recommended and lobbied Congress to adopt a very limited option for individual wage-earners, under age 50, to direct a very limited portion of their newly created account into a stock market index pool. But President Bush failed to deliver his message in layman’s language. Congress never seriously considered the proposal, despite the fact that, in 2005, the President’s political party was a dominant majority in both Houses of Congress. In fact, the proposal never came to the House floor for a vote. “Too risky,” said some members. “Just another Wall Street fat-cat scheme!”, said others.
Therefore, we recommend:
As a start, reinstate the System’s original design: an independently managed Social Security Trust Fund, to be funded with real money. [In Government language, the Trust Fund would become an “off-budget” item.] Perhaps the fact that the System is now a drag on annual federal budgets, might convince Congresspeople to like a “separation solution”.
Revive President George W. Bush’s 2005 proposal (or, at least the concept of it); update it, re-configure it; develop a layman’s language presentation (which apparently was never done). Because nothing significant has been done since 2005 to salvage the System’s survival, a re-tread of the Bush proposal must now be more aggressive (which is not to suggest “more risky”). We know a lot more now about structuring individual employees’ retirement savings in commingled equity market funds and making retirement accounts portable from one job to the next. We also venture to say that today’s Congress knows a lot more about the subject.
Discussion: The riskiness of investing in common stocks: For context, here are background facts that we can use to measure the “riskiness” of investing in a diversified portfolio of US common stocks (our measurement tool is the Dow Jones Industrial Average index, including re-invested dividends):
The Dow’s cumulative total return was well over 130,000% from 1937 through 2025.
There were only two rolling, five-calendar-year periods, 1941 and 1942, when the Dow Jones Index experienced a very small negative total return.
Over time, a portion of stock price returns will offset inflation. From 1937 through 2025, the CPI inflation rate rose 2,212 %. Inflation serves as a discount, to arrive at the net “real” return from bond investments. Bond investments have no way to recover that discount.
This Just In (June 2026): Social Security System Trustees 2026 Annual Report, signed by three Cabinet Secretaries (note: the two Public Trustee slots are “vacant”).
Our Summary of the Trustees’ Summary:
The System’s Old Age Retirement Trust Fund investment pool in special US Treasury notes and bonds will go to zero in 2032. And after that, the System’s FICA tax collections will only be enough to fund 78 percent of each retiree’s amount due. That percentage will gradually shrink to about 73 percent by 2050.
The Trustees provide “illustrations” (not legislative proposals) of several ways to overcome the System’s “solvency shortfall”, beginning after 2032:
Increase the payroll tax from 12.4% to 16.65%, starting now
Reduce benefits by 25% for all current and future retirees, starting now
Reduce benefits by 30% for future retirees, starting now
Income tax on Social Security benefits: Most retirees pay income tax on their Social Security benefits income; that tax collection is credited to the Trust Fund. The One Big Beautiful Bill Act of 2025 (OBBB) eliminated the income tax on Social Security benefits paid to most of the middle- and lower-income retirees.
Total Social Security retirement figures in 2025:
Income $1,248 billion (including $58 billion of income tax on 85% of individual benefit that exceeds $25,000)
Benefits paid $1,448 billion
Deficit $(200) billion
Reminder: one-thousand billion = one trillion (a number which, we maintain, is beyond human comprehension)
Gold Update
After a 64% “melt-up” in 2025, which had followed a 27% runup in 2024, gold’s price was up by another 25% during January 2026. But then it declined 17% during the 5 months of February through June.
GLD is the Exchange Traded Fund (ETF) that anyone can own inside a brokerage account; it physically owns nothing but gold bullion bars, stored mostly in London vaults. On the last day of January 2026, it traded up to its all-time closing high value, before it began a mixed, downward trend, from February through June.
Note: The upward market action in the silver bullion ETF: SLV has been even more dramatic than gold.
The melt-up activity in gold for the past 3+ years has been mostly attributed to global central banks, which, according to various sources, have been selling their investment in US Treasury notes and bills to pay for their presumed-permanent gold purchases. Global central banks do not re-vamp their reserves in reaction to temporary goings-on.
In recent years, increasing amounts of international trade transactions have been executed in Chinese Yuan and in a currency created by the so-called BRICS+ nations, for their use in trade among themselves. All of those countries have been significant net sellers of US Dollars and buyers of gold.
1 The One Big Beautiful Bill Act’s “no income tax on Social Security” provisions have thresholds and limits; estimates indicate zero tax on Social Security benefits for almost 90% of all recipients over age 65.
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