It's no secret that Social Security is nearing a funding crisis that could threaten the financial security of millions of Americans who depend on it. But a lot of people aren't clear on what's actually causing the issue or when recipients will be affected. So it's time to clear that up.
Below, we'll answer both questions. We'll also talk about what the government can do to avert a major disaster and how workers and seniors can prepare for what's ahead.
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Why is Social Security in trouble?
Social Security has three primary funding sources:
- Social Security payroll taxes: Workers pay these taxes on the first $147,000 they earn in 2022, and the first $160,200 they earn in 2023. This provides the bulk of the program's money.
- Social Security benefit taxes: Seniors with high enough incomes may pay federal taxes on a portion of their Social Security benefits.
- Interest earned on Social Security's trust funds: The government invests any money taken in from the two above sources that's not needed for benefit payments in government-backed securities. These earn interest over time, and that interest helps pay for future Social Security benefits.
This system worked well for several decades, but things started going wrong when the baby boomers began retiring. This led to a larger number of seniors claiming benefits than ever before. And since the generations after them were smaller, there were fewer workers left behind to pay Social Security payroll taxes in their stead.
Because of this, Social Security's payroll and benefit taxes haven't been enough to cover all scheduled benefits, and the trust funds have been slowly dwindling. Costs began exceeding total income in 2021, and if nothing changes, the program will eventually reach a point where the trust funds are depleted and it can't pay out all the benefits it owes. Fortunately, that moment isn't going to come in 2023.
The latest Social Security Trustees Report estimates that the trust funds will be fully depleted in 2035. After this, it will only be able to pay out about 80% of scheduled benefits. This will decline to 74% by 2096.
The good news here is that Social Security isn't going away even if the worst happens. It will still continue to take in money every year through payroll taxes and Social Security benefit taxes. But you may not get as much as you hoped for.
Is there a way to avoid benefit cuts?
It's possible the government could avoid Social Security benefit cuts by altering the program in some way before the trust funds are fully depleted. Politicians on both sides of the aisle understand this is a serious issue that needs addressing, but so far, they haven't been able to come together on a way to solve it.
Some possible solutions include:
- Raising or eliminating the ceiling on income subject to Social Security taxes
- Raising the full retirement age (FRA), which determines when workers qualify for their full Social Security benefit
- Raising the Social Security payroll tax rate, which is currently 12.4%, split equally between employee and employer
The solution may include a combination of these things, or something entirely different. For now, all we can do is wait to see what happens.
If you're concerned about how Social Security benefit cuts could affect your financial security in retirement, try to reduce your reliance upon it. Those who are still working can attempt to beef up their personal savings, and those who are already retired might consider cutting back spending or taking a part-time job to help their savings last longer.
This might not be what you want to hear, but for the time being, it's about the only thing we can do to prepare for Social Security's uncertain future. Hopefully, the government will find some sort of agreeable solution before benefit cuts become necessary, but only time will tell.
