It's no secret that Social Security has its challenges. For years, Americans have worried that the program is going bankrupt and that their benefits may be at risk, and Congress has long debated various solutions.
The good news is that Social Security isn't running out of money or going away entirely. But the bad news is that it's facing a cash shortage that could impact your benefits in the future.
The biggest problem plaguing Social Security
Social Security's most pressing issue right now is that it's relying too heavily on its trust funds.
The program depends primarily on payroll taxes to fund benefits. Workers pay into the program through taxes, and that money is funneled out to current retirees via benefits.
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However, over the last several years, the money coming in from taxes hasn't been enough to fully fund benefits. As a result, the Social Security Administration (SSA) has been tapping its trust funds to continue making payments in full and avoid cutting benefits.
Those trust funds won't last forever, though, and the SSA Board of Trustees estimates that they'll both be depleted by around 2034. At that point, the program's regular income sources will only be enough to cover around 80% of projected benefits.
While lawmakers haven't settled on anything yet in regard to the program's future, there are two takeaways that can help you better plan your retirement.
1. A variety of potential solutions
There are two core ways to solve Social Security's cash shortfall: increase the program's income or decrease its expenditures. Exactly how Congress plans to do that, however, is unclear.
Right now, there are a few potential solutions that have garnered the most attention. Again, nothing is set in stone yet, but these types of solutions are likely possibilities:
- Increase taxes on the wealthy: Currently, only income up to $160,200 per year is subject to Social Security taxes. This proposal would also tax income over $400,000 per year, dramatically increasing the program's income.
- Raise payroll taxes: Another proposal is to raise the payroll tax itself from 6.2% to 6.5% for both employees and employers. Like the previous solution, this would increase Social Security's funding -- except it would affect all workers subject to payroll taxes, not just those earning a certain income.
- Reduce benefits for high earners: The alternative to boosting Social Security's funding is to reduce its expenses, and one way to do that is to lower benefits for the top 20% of earners. Because this proposal is still being discussed, it's unclear what the income limits might be or who would be affected.
- Increase the full retirement age (FRA): The FRA is the age at which you'll receive the full benefit amount you're entitled to, based on your work history. It's age 67 for anyone born in 1960 or later. But lawmakers have proposed raising the FRA to at least 68 (with some arguing to push it to 70). A higher FRA means older adults will need to wait longer to collect their full benefit amount, reducing their lifetime benefits.
These aren't the only solutions on the table, however. Other options include everything from privatizing part of Social Security to expanding the type of workers subject to payroll taxes (such as state and local employees, who often aren't covered by Social Security) to changing how benefits are calculated.
2. Multiple changes could be necessary
Like many political topics, there likely isn't a solution that will make everyone happy. So regardless of which direction Congress chooses, some people will have to make sacrifices. But it's also possible lawmakers may need to implement multiple big changes to fully solve the problem.
Of the four proposals above, raising taxes for the wealthy would be the most effective. But even that option would only reduce Social Security's shortfall by around 61%, according to data from the University of Maryland.
Unless Congress is able to come up with a single proposal to get the program's finances back on track, there's a chance there could be several changes on the horizon. And as the clock ticks closer to 2034, lawmakers will be under increased pressure to do something before benefit cuts are a reality.
There's not much that current workers or retirees can do about the future of Social Security. But by staying informed about the issues and potential solutions, you can ensure you're as prepared as possible for whatever may happen.
