Please ensure Javascript is enabled for purposes of website accessibility

Social Security Cuts Are Still on the Table -- and They're Larger Than They Were Before

By Maurie Backman – Apr 25, 2020 at 5:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Talk about bad news.

Social Security serves as a key source of income for millions of older Americans. But this week, some bad news emerged on the Social Security front.

According to the just-released 2020 Trustees Report, the program's trust funds are expected to run out by 2035. Now that date isn't shocking; it aligns with what the 2019 Trustees Report predicted. What does get worse, however, is the extent to which benefits may be cut in the absence of those trust funds.

Last year, the Social Security Trustees projected a 20% reduction in scheduled benefits come 2035. This year, they're calling for a 21% reduction. And while that 1% may not seem like a huge jump, let's remember that many seniors count on Social Security as their primary or sole source of income. To lose any amount of those benefits in the future could therefore be downright catastrophic.

Social Security cards


A potentially bleak future

To clarify one point of confusion on the Social Security front, the program is not in danger of running out of money completely. Social Security gets the bulk of its funding from payroll taxes -- the ones employees pay for the privilege of having a job. However, in the coming years, the program is expected to owe more in benefits than it collects in revenue.

Why? Baby boomers are exiting the workforce in rapid succession, and there aren't enough workers coming to take their place. As such, Social Security will be spending more on benefits than the money it takes in. Now the program does have trust funds it can tap in that scenario to avoid cutting benefits to those who need them -- think of those funds as a savings account of sorts. But once those trust funds run out, Social Security will have no way of compensating for its revenue shortfall, and so current and future recipients may be looking at sizable benefit cuts if lawmakers aren't able to step in with a fix.

Of course, there's no easy answer to what a fix might entail. A number of solutions have been tossed around, all of which have their own unfavorable consequences. One idea is to raise or even eliminate the payroll tax cap to generate more income for Social Security. Right now, workers only pay Social Security tax on their first $137,700 of earnings. Increasing that threshold would raise more money for the program, but also put a strain on earners whose income is moderately high, but not extraordinarily high. (Remember, $137,700 is not a particularly high salary in parts of the country where a starter home costs close to $1 million.)

Another suggestion is to raise full retirement age, or the age at which seniors are entitled to collect their monthly benefit in full. The logic is that since Americans are living longer, doing so buys the program a bit of a financial reprieve without denying recipients the income they're entitled to. But critics of this idea are quick to point out that life expectancies haven't risen proportionately among lower-income individuals, and that raising Social Security's full retirement age will ultimately hurt the people who need those benefits the most.

Unfortunately, there's really no great solution to Social Security's financial woes. Both current and future recipients alike should therefore brace for the possibility that come 2035, benefits may look a lot different.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.