The huge Social Security increase that's on the way within a matter of weeks is old news now. If you already receive Social Security benefits or aren't too far off from doing so, you almost certainly know that the cost-of-living adjustment (COLA) next year will be 8.7%.
However, there are other Social Security changes that won't help people financially. For example, a higher salary cap will be implemented for payroll taxes that fund the federal program. But here's the one Social Security change in 2023 that's going to hurt the worst.
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The most important change of all
The change next year that's going to hurt the worst isn't one that the Social Security Administration (SSA) has officially announced. The agency doesn't have to say anything about it. Why? This change is one that's been going on for years. And it's arguably the most important Social Security change of all.
I'm referring to the continual change (to be specific, the continual decline) in the Social Security Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds. In 2021, these trust funds combined decreased by $56.3 billion. At the end of the year, the combined assets in the trust funds totaled roughly $2.85 trillion.
The Social Security trustees projected in their 2022 report that the combined trust fund ratio (the percentage of asset reserves at the beginning of the year to annual costs for the year) will decline at a faster rate going forward than it has historically. However, this assumed an inflation rate of around 4.5% in 2022 and 2.3% in 2023. The actual inflation rate this year has been much higher and seems likely to remain relatively into next year.
That means that the Social Security trustees' projections were overly optimistic. The trust funds are likely to be depleted at an even faster rate than they counted on. The reason why this decline is the most important Social Security change of all -- and the one that's going to hurt the most -- is that it ultimately will lead to the program becoming insolvent.
Delayed pain
The good news is that you won't experience the pain from this decline in Social Security trust fund assets next year. As of now, the combined Social Security trust funds are on pace to run out of money in 2035.
Some worry that Social Security won't be able to fund any benefits when the program becomes insolvent. That's not going to happen.
Remember that ongoing payroll taxes fund much of Social Security's costs. Those taxes will continue to pour in. However, once the trust funds are depleted in 2035, these taxes will only be enough to cover around 80% of benefits through the rest of that year. The percentage will fall to 74% over the long term.
A reduction in Social Security benefits in this range would be highly painful for many Americans. But it's coming unless major reforms are made to the program.
Potential solutions
There's a tremendous amount of polarization between Democrats and Republicans. This might seem to indicate that any compromises on preserving Social Security are unlikely. However, the closer we get to Social Security becoming insolvent, the greater pressure there will be on politicians in both parties to take action.
Some potential solutions already enjoy bipartisan support among Americans. For example, making all wages over $400,000 subject to the Social Security payroll tax was viewed favorably by 79% of Republicans and 88% of Democrats in a recent survey conducted by the University of Maryland's Program for Public Consultation. This same survey found that 70% of Republicans and 78% of Democrats support increasing the payroll tax from 6.2% to 6.5%.
Other proposals also enjoyed strong bipartisan support, based on the survey results. These include gradually increasing the full retirement age from 67 to 68 and reducing Social Security benefits for high earners.
Granted, some of these solutions are painful themselves. But these ideas would together prevent the slashing of benefits for all Social Security recipients that's on the way if nothing is done.
No matter how you look at it, the decline in the trust fund reserves next year will be the Social Security change that will ultimately hurt the worst. The unanswered questions, though, are which Americans will feel the brunt of the pain and exactly how much will it hurt.
