Time is the most precious commodity there is. The Social Security program needs more of that commodity.
In June of last year, Social Security's trustees projected that the federal program's combined trust funds would be depleted by 2035. In only 12 years, retirees could face significant benefit cuts if no changes to Social Security are made.
That timeline could be overly optimistic, though. In December 2022, the Congressional Budget Office (CBO) estimated that Social Security could become insolvent in 2033 -- two years earlier than the program's trustees projected.
But now, there's even worse news. Social Security's trust fund might run out of money even sooner than expected.
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The clock could be ticking faster
Earlier this month, the CBO revised its forecast for when Social Security's trust funds will be depleted. It now projects that the Old-Age and Survivors Insurance Trust Fund, which funds retirement benefits, will run out of money in 2032, one year earlier than its estimate from just two months ago.
The CBO didn't estimate when Social Security's Disability Insurance Trust Fund will be depleted in its recent update. This is a separate fund used to pay disability benefits. It's possible that Congress could tap this fund to help pay full retirement benefits for a longer period. However, doing so wouldn't buy much time.
The Social Security trustees' 2022 report estimated that combining the two trust funds would only push back insolvency by one year. CBO Director Phillip Swagel didn't sound positive in his public remarks when he said, "The Social Security solvency date -- the exhaustion date for the trust fund -- is now within the budget window [2023 to 2033]."
Why has the insolvency date been revised to a year earlier? Blame it on the big cost-of-living adjustment (COLA) given to Social Security beneficiaries. Swagel said that the high COLA directly led to the CBO revising its projection of when the Social Security trust fund will run out of money forward by one year.
How Social Security benefits might be preserved
To be clear, Social Security won't go bankrupt when its trust funds are depleted. Ongoing payroll taxes would still generate revenue to fund benefits. However, once the trust funds run out of money, Social Security benefits will be reduced by more than 20% unless something is done.
There are several alternatives for preventing benefit cuts when Social Security's trust funds are exhausted. For example, President Biden proposed in his 2020 campaign that all annual income above $400,000 be subject to the payroll tax that helps fund Social Security.
The Republican Study Committee (RSC), which includes 165 GOP members of the House of Representatives, has put forward the idea of gradually increasing the full retirement age from 67 to 70. A similar approach was adopted in the past, with the full retirement age gradually increasing from 65 to 67.
Ultimately, the proposals fall into one of two categories: increasing revenue or reducing benefits for some Americans. It's possible that some combination of these solutions will be adopted before Social Security's trust funds are wiped out.
What should retirees do?
Retirees don't need to panic. Politicians in Washington know that it would be disastrous for their careers if they allow Social Security benefits to be slashed when the trust funds run out of money. It's likely that some reforms will be made to bolster the program, although don't be surprised if the changes are made near the last minute.
One thing that retirees can do is voice their views to their elected representatives. Let members of Congress know which approaches you prefer to be taken to preserve Social Security benefits.
For Americans who haven't retired yet, building up retirement funds outside of Social Security is a smart move. The program wasn't designed to fully meet retirement income needs. Contributing to IRAs, 401(k) plans, or other retirement accounts can help make sure that you enjoy your retirement years regardless of what changes are made to Social Security.
