Please ensure Javascript is enabled for purposes of website accessibility

This Dreaded Social Security Milestone Is Coming in 2021

By Maurie Backman – Sep 23, 2020 at 12:01PM

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

Are you ready for it?

Tens of millions of seniors count on Social Security to provide retirement income, and among those without a pension or personal savings, that dependency tends to be even stronger. But Social Security is grappling with its share of financial woes, and those troubles may, in fact, come to a head as early as the upcoming year.

Social Security's serious shortfall

Starting in 2021, Social Security is expected to spend more money keeping up with its obligations than it collects in revenue. The reason? Social Security gets the bulk of its revenue from payroll taxes -- the ones that apply to earnings of up to a certain limit that changes annually (for 2020, it's $137,700). But as baby boomers leave the workforce in droves and start drawing on their own benefits, the program will suddenly be in a tight spot where its obligations exceed its revenue.

Loose stack of Social Security cards

Image source: Getty Images.

Now the good news is that Social Security has trust funds it can tap to close that gap. But those funds will only last for so long. This past April, the program's Trustees projected that those funds may run dry come 2035, but given the events of the past six months -- namely, record-high unemployment -- that timeline could be pushed up. Once there's no more money in the Social Security trust funds, benefit cuts may be inevitable.

Can lawmakers fix Social Security?

Social Security serves as a financial lifeline for many, many seniors, and so sitting back and just allowing benefit cuts to happen would be imprudent on the part of lawmakers. The problem, however, is that there doesn't seem to be a great solution to fixing the problem at hand.

At a basic level, Social Security needs a way to generate more revenue to avoid a scenario where it's forced to spend less on benefits, and in that regard, raising the annual wage cap is an oft-discussed solution. As mentioned earlier, Social Security taxes cease to apply once wages exceed $137,700. By increasing that earnings cap, or even eliminating it altogether, the program can boost its incoming revenue and potentially avoid having to slash benefits in the not-so-distant future.

But let's stop for a minute and think about who that change would most impact. That's right: higher earners -- those who wield a fair amount of political power and are unlikely to accept that news graciously. As such, it's not as good a solution as it might seem to be.

Another option is to raise full retirement age, or the age at which seniors are entitled to collect their monthly benefit in full. For anyone born in 1960 or later, that age is 67, but some lawmakers have argued that raising it is reasonable given the way life expectancies have shifted. Delaying full retirement age would also serve the purpose of bringing in more revenue for Social Security, as many people would then be forced to continue working and forking over payroll taxes on their income. But critics of this solution argue that it's particularly unfair to lower-income seniors, who are less likely to live a longer lifespan than higher earners.

As such, things are at a standstill with regard to saving Social Security, and so current and future recipients alike may need to gear up for benefit cuts. Of course, the hope is that lawmakers will prevent that from happening, but given the way Democrats and Republicans have struggled to come to terms on something as essential as a second stimulus bill, it's doubtful they'll have an easy time figuring out how to dig Social Security out of its impending hole.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 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 11/30/2022.

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.