There are rumors circulating that Social Security is on the verge of bankruptcy and that future retirees won't be able to collect monthly benefits from the program. Thankfully, those rumors are simply just that.
Social Security is facing financial challenges that could force the program to implement benefit cuts. But it's not at risk of disappearing entirely.
The issue is that in the coming years, baby boomers are expected to leave the labor force in droves, and a smaller number of workers will come in to replace them. Since Social Security's main source of funding is payroll tax revenue, that puts the program in a tough spot.
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Social Security has trust funds it can tap to keep up with scheduled benefits over the next 14 years or so. But once those trust funds run dry, benefit cuts will be a distinct possibility.
Lawmakers, however, don't want to see that happen. And so many have introduced potential solutions to prevent a reduction in benefits. But unfortunately, each suggestion seems to come with at least one glaring flaw.
A lose-lose situation
Lawmakers have to do what they can to prevent Social Security cuts so that current retirees without sufficient personal savings aren't utterly plunged into poverty. But every suggestion that's been brought to the table to pump money into Social Security has an obvious downside.
One idea is to push back full retirement age (FRA) so that workers have to wait longer to get their full monthly benefits. Right now, that age is 67 for anyone born in 1960 or later. Moving it to 68 or 69 could help address Social Security's funding issues, but the drawback is that people who thought they could retire at 67 might then have to stay in the workforce longer than they wanted to.
Another idea that's been floated is raising the wage cap for Social Security taxes. Currently, earnings above 160,200 are not taxable for Social Security purposes. But if Social Security taxes are imposed on higher incomes, then the program might have to raise the maximum monthly benefit it pays out. So all told, Social Security might not gain all that much financially.
Then there's the idea of raising the Social Security tax rate, which is currently 12.4%. It's a suggestion that stands to impact workers across all income ranges. If that tax rate were to go up to, say, 14.4%, it would no doubt result in a lot more revenue for Social Security. But, on the flipside, it would leave workers losing more of their income to taxes, which pretty much nobody wants.
What does the future hold for Social Security?
Allowing Social Security cuts to happen is far from an ideal solution. The problem, though, is that lawmakers have struggled to find another one that tackles the issue at hand without causing a major problem in its wake.
As such, it's really hard to predict what the future has in store for Social Security. It's clear that the program has staying power, since its primarily funded by worker taxes. But it's hard to say with certainty whether retirees will be doomed to benefit cuts or not. And current workers may want to take steps to boost their personal savings in case lawmakers cannot, in fact, find a reasonable solution to prevent those cuts from happening.
