Time is running out. And it's happening faster than initially expected.
That's the really bad news for Social Security recipients from the latest annual Social Security Trustees report. Last year, the Trustees warned that Social Security's combined trust funds would be depleted by 2035. Now, however, the Trustees have revised their estimated insolvency timeline to 2034.
The popular program won't be bankrupt in 11 years. But Social Security benefits could be slashed by roughly 25% in the next decade without big changes.
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Headed for insolvency
Social Security's dilemma is simple: Its costs are greater than its income. While experts have warned about the issue for a long time, the imbalance is actually a fairly recent problem.
The program's total costs first exceeded its total income in 2021. But interest from Social Security's two trust funds -- one for the Old-Age and Survivors Insurance (OASI) program and another for the Disability Insurance (DI) program -- has helped significantly. Without this interest income, Social Security would have been operating in the red since 2010.
If you only look at last year's numbers, this problem might not seem overly concerning. The Social Security Trustees reported that the program's total income in 2022 was $1.222 billion, and it spent $1.244 billion. The assets held in the two Social Security trust funds declined from $2.852 trillion to $2.830 trillion. There's still a lot of money left in the trust funds.
However, the situation will worsen in the coming years. Baby boomers are retiring at a much faster rate than new workers are entering the workforce. If inflation remains high, Social Security's cost-of-living adjustments (COLAs) will also be higher. This would require even more money to be siphoned out of the trust funds.
The bottom line is that Social Security is headed for insolvency by 2034. The only way this fate will be avoided is with major reforms to the program.
Painful solutions
What happens if nothing is done until the trust funds run out of money? Congress will basically have three options to keep Social Security solvent through 2097, according to the program's Trustees:
- Increase revenue by the equivalent of a Social Security payroll tax increase of more than one-third (from 12.4% to 16.55%).
- Slash benefits by the equivalent of a permanent cut of 25.2% for all Social Security recipients.
- Some combination of tax increases and benefit cuts.
What if Congress takes action sooner? The same options apply, but the amounts of the revenue increases and/or benefit cuts will be lower.
Keep in mind that Congress doesn't have to raise revenue by increasing the payroll tax for all workers. It could enact other measures to boost income, such as increasing the payroll tax cap (the maximum salary for which payroll taxes are paid). Congress could also gradually increase the full retirement age for future retirees to avoid cutting benefits for current retirees and individuals retiring over a set period in the not-too-distant future.
Political realities
Most representatives and senators, as well as the president, don't want steep Social Security benefits cuts. They are well aware of the political repercussions they'd likely face at the ballot box if they reduce the retirement benefits for millions of Americans. Because of the stark political realities, there's a good chance that some reforms will be made to Social Security within the next few years.
But it's also likely that Social Security won't be changed in a way that permanently ensures its solvency. The easiest solutions for Congress will be the ones that kick the can down the road while preventing benefit cuts over the near term.
