What if the story we were told about Social Security’s financing was just a myth? As the program faces increasing financial strain, it is imperative that we are clear‐​eyed about how Social Security’s spending impacts American workers and the federal deficit. Every year Social Security runs a cash‐​flow deficit, it exacerbates our nation’s fiscal challenges, threatening Americans with higher future taxes or an unsustainable debt. Social Security’s cumulative $4.1 trillion deficit over the next 10 years underscores the urgent need for reform, not in 2033 when the ‘trust fund’ will be depleted, but ASAP.

“Understanding is the first step to acceptance, and only with acceptance can there be recovery,” wrote bestselling author J.K. Rowling, on the importance of facing facts and dealing with difficult truths, in Harry Potter and the Goblet of Fire. The root of the problem arises from Social Security’s pay‐​as‐​you‐​go nature in combination with an internal governmental accounting ledger referred to as the Trust Fund.

This structure has created a common myth about Social Security: that the Social Security Trust Fund contains real savings that can be used to pay future benefits. Many people believe that the payroll taxes they pay are set aside in individual accounts or in a secure fund that will be there for them when they retire. Politicians have perpetuated this myth for decades, including Senator Bernie Sanders who claimed, “Social Security has a $2.8 trillion surplus in its trust fund and can pay out every benefit owed to every eligible American for the next 19 years.” However, this is not how the system actually works.

In reality, Social Security operates on a pay‐​as‐​you‐​go basis. This means that the payroll taxes collected from current workers are immediately used to pay benefits to current retirees. Any surplus funds are credited to the Social Security Trust Fund, but these are not cash reserves; they are special‐​issue Treasury bonds, which are essentially IOUs from the federal government.

When Social Security runs a deficit—meaning it pays out more in benefits than it collects in taxes—it must redeem these bonds to cover the shortfall. The federal government then has to come up with the cash to honor these IOUs, either by raising taxes, cutting spending in other areas, or borrowing more money. Thus, the Trust Fund does not contain real, liquid assets but rather a promise that the government will pay itself back, which ultimately depends on the federal budget’s overall health and fiscal policy.

This myth gives a false sense of security about the program’s financial stability and obscures the urgent need for reforms while the “trust fund” has a positive balance, to be depleted by 2033. This is the critical misconception: the existence of the Social Security Trust Fund does not make it easier to pay benefits when they come due. The Trust Fund’s assets are not tangible savings but IOUs from the federal government to itself. When Social Security needs to redeem these bonds to cover benefit payments, the Treasury must find the money somewhere other than from the trust fund—either by collecting more in taxes, redirecting other spending, or increasing the national debt.

The implication is that Social Security’s cash‐​flow deficits directly contribute to the federal deficit. Each dollar redeemed from the Trust Fund is a dollar the Treasury must come up with, exacerbating our fiscal imbalance. The below figure shows how Social Security cash‐​flow deficits plus associated interest costs will add about $4.1 trillion to the federal government’s deficits over this decade.*

This situation is unsustainable, especially given demographic trends that are increasing the number of beneficiaries relative to the number of workers. There’s also the specter of higher future inflation and a slower‐​growing economy (so‐​called stagflation) that would increase benefit costs automatically through cost‐​of‐​living adjustments as Social Security’s tax base dwindles should wage growth fail to exceed higher prices.

Waiting until 2033 to address these issues is a perilous gamble. Delaying reforms only magnifies the problem, requiring more drastic measures down the road. Early intervention allows for more measured, gradual adjustments that can be phased in to minimize disruption and spread the burden more equitably across generations.

So, what can be done? Lawmakers have several options, though none are politically easy. One approach is to gradually raise the retirement age, reflecting increases in life expectancy. This would reduce the number of years individuals receive benefits, helping to balance the system. Another option is to adjust the benefit formula to slow the growth of future benefits, particularly for higher earners. This could take the form of indexing initial benefits to prices, rather than wages, or moving to a universal benefit formula based on average wages, rather than individually earned income.

President Biden has suggested eliminating the payroll tax cap for wage earners who make more than $400,000 a year. The amount of revenue raised would be a far cry from resolving Social Security’s financing issues. Even eliminating the payroll tax cap entirely would merely stave off Social Security deficits for five years.

Comprehensive, bipartisan reform will likely involve a combination of spending reductions and tax hikes. The sooner inevitable changes are made the better, spreading the impact and addressing the red ink before it presents a long‐​term double‐​whammy of higher debt plus interest costs.

The bottom line is clear: Social Security’s financial challenges are a significant contributor to the federal deficit, and the Trust Fund’s existence does not mitigate this impact. Legislators must act now to reform the program, ensuring its sustainability for future generations without imposing undue burdens on current workers or resorting to excessive borrowing. The time for political courage is now, well before the 2033 deadline forces legislators’ hands. By addressing these issues proactively, we can preserve Social Security’s promise to keep seniors out of poverty without undermining the economic future of younger generations.

*The figure shows Social Security’s Old‐​Age and Survivors Insurance (OASI) cash‐​flow deficits or contributions to the federal deficits from 2024 to 2033 (the year of the trust fund’s exhaustion), based on the CBO’s updated Budget and Economic Outlook. Calculations exclude intragovernmental transactions, such as interest earned on the OASI trust fund’s balances. Estimates also exclude administrative expenses, consistent with the CBO’s approach of distinguishing the costs of benefits from the program’s operational costs when calculating Social Security’s contribution to deficits. Projections include the interest costs of cash flow deficits, calculated using the CBO’s interactive interest cost calculator, but exclude the program’s legacy costs (any interest incurred based on past deficits).