It's no secret that Social Security is facing problems. For years, Americans have been concerned that the program is on the verge of bankruptcy. In fact, nearly 60% of retirees say they're worried Social Security won't last throughout their retirement, according to a 2022 survey by The Motley Fool.
The good news is that lawmakers are aware of the issue and trying to find solutions. The not-so-good news, though, is that some of those solutions could result in less money in benefits for retirees.
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Is Social Security going bankrupt?
Despite popular belief, Social Security isn't going to collapse. However, it is experiencing a cash shortage that could lead to benefit cuts if left unchecked.
The program relies heavily on payroll taxes to fund benefits. But in recent years, the money coming in from taxes hasn't been enough to cover all the benefits that need to be paid out. As a result, the Social Security Administration (SSA) has had to dip into its trust funds to bridge the gap.
But those trust funds won't last forever. According to the most recent projections from the SSA Board of Trustees, both of the program's trust funds are expected to be depleted by 2034. At that point, other sources of income would only be able to cover around 80% of future benefits.
In other words, if nothing changes between now and 2034, benefits could potentially be cut by up to 20% once the trust funds run dry.
Washington may have big changes on the horizon
To be clear, lawmakers haven't yet agreed on any changes to Social Security. This is still a hotly debated topic in Congress, and it's unclear when or if any of these solutions may take effect.
That said, there are a few potential changes that have gained widespread support across both political parties. While these aren't written in stone, it's wise to be aware of them if you're relying on Social Security in retirement.
1. Increase taxes for wealthy Americans
Currently, only income up to $160,200 per year is subject to Social Security taxes. But some lawmakers have proposed taxing income above $400,000 per year for Social Security purposes, which would dramatically increase the program's funding.
This solution would eliminate around 61% of Social Security's cash shortfall, according to data from the University of Maryland. Approximately 79% of Republican voters and 88% of Democrats are in favor of it.
2. Raise the payroll tax
Another way to increase Social Security's cash flow is to raise the payroll tax from 6.2% to 6.5%. This would affect all workers paying payroll taxes, but it's only expected to eliminate around 16% of the program's shortfall.
It's also not as popular as the previous solution, as only 70% of Republicans and 78% of Democrats support this proposal.
3. Reduce benefits for high earners
While the first two potential solutions focus on increasing Social Security's income, the other two aim to reduce the program's expenditures. Around 78% of Republicans and 86% of Democrats are in favor of reducing benefits for higher earners, which would eliminate around 11% of the shortfall.
Because this proposal is still being debated, there aren't any concrete details about who would be affected or by how much. But some lawmakers have suggested reducing benefits for the top 20% of earners. These beneficiaries would still receive larger-than-average payments, but not as large as they're used to.
4. Increase the full retirement age
Another option for reducing the program's spending is to gradually raise the full retirement age (FRA) from 67 to 68 or beyond -- with some lawmakers proposing raising it to 70.
A higher FRA means older adults would need to wait longer to collect their full benefit amount. While your monthly payment at your FRA would be the same, you'd receive less in total benefits over a lifetime.
This solution isn't as popular as the previous one, supported by only 75% of Republicans and 76% of Democrats. It's also only expected to reduce the shortfall by around 14%.
What's ahead for Social Security?
Again, nothing is set in stone yet, so it's unclear whether any of these changes will take effect. But as we inch closer to 2034, Washington will need to do something before the trust funds run dry and benefit cuts are on the table.
At the moment, raising taxes for those earning more than $400,000 per year is the most popular and the most effective proposal. But even that will only eliminate roughly two-thirds of the shortfall, so Congress may need to implement multiple changes to fully solve the problem.
Social Security's future may be up in the air, but it's not going bankrupt. By staying on top of any potential changes to the program, you can take steps to prepare yourself accordingly -- regardless of what may happen to your benefits.
