Social Security makes up a substantial source of income for millions of seniors, and many Americans are concerned that the program won't be around for much longer. While Social Security is experiencing some cash flow problems, it's not as unstable as some may believe.
Here's what you need to know about the future of the program and how it could affect your retirement benefits.
Concerns surrounding Social Security
Social Security benefits are funded primarily through payroll taxes. Workers pay into the program through taxes, and then that money goes out to retirees through benefits.
However, Social Security's expenses are surpassing its income, so there's more money flowing out of the program in benefits than is coming in from taxes. As a result, the Social Security Administration (SSA) is facing a cash shortage.
To cover this deficit, the SSA has been dipping into its two trust funds: the Old Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. Together, they're called OASDI funds.
Tapping the OASDI funds works as a short-term solution. But according to the most recent estimates from the SSA Board of Trustees, both of these funds will likely be depleted by 2035.
What does this mean for the future of Social Security?
There's good news and bad news about the trust funds running dry. The bad news is that benefits could be slashed by up to 20%. But the good news is that the program isn't going bankrupt.
One common misconception about Social Security's cash shortage is that once the trust funds are depleted, benefits will go away entirely. In reality, as long as workers continue paying payroll taxes, there will always be some money to pay out in benefits.
Currently, it's estimated that those taxes and other sources of income will only be enough to cover around 80% of projected benefits, which means benefits could be reduced by 2035. But even if that happens, Social Security isn't going away completely.
How does Washington plan to fix the problem?
As we get closer to 2035, lawmakers will face increased pressure to find a way to solve Social Security's cash flow problems. While nothing is set in stone yet, there are a few potential solutions on the table:
- Increase payroll taxes for high earners: One of the most popular potential solutions is to raise payroll taxes for workers earning more than $400,000 per year. This would increase the amount of money flowing into the program, providing the SSA with more cash to pay out in benefits.
- Raise the full retirement age: Currently, the full retirement age is between ages 66 and 67, depending on the year in which you were born. But some lawmakers have suggested raising that age to 68 or older. That means people would need to wait longer to receive their full benefit amount, decreasing the amount they receive over a lifetime and reducing Social Security's expenses.
- Reduce benefits for the highest earners: Another potential solution is to reduce benefits for the top 20% of earners. High earners will still receive larger payments than lower earners, but the gap would be smaller than in the past. This would reduce Social Security's expenses and allow the SSA to continue paying out full benefits to the lower 80% of earners.
Lawmakers have yet to come to an agreement on how to solve Social Security's problems. But with the clock ticking, they'll need to start compromising soon so that retirees can avoid potential benefit cuts.