You've probably heard quite a bit about the dire outlook for Social Security. Some say the program is going broke, and many Americans don't expect to receive any benefits when they retire.
But not everything you hear is correct. Here's the surprising truth about the future of Social Security.
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The picture isn't as bleak as many think it is
First, Social Security is emphatically not going broke or bankrupt. So why do many people think it is? As is often the case, there's a kernel of truth behind the misconception. The two Social Security trust funds are indeed on course to run out of money.
The Social Security program's trustees project that the Old-Age and Survivors Insurance (OASI) trust fund will be depleted by 2033. The Disability Insurance (DI) trust fund could fund benefits for another 75 or more years if it was only used for disability insurance.
However, it's likely that the federal government would tap the DI trust fund to help pay for retirement benefits when the OASI trust fund runs out of money. Unfortunately, that option doesn't help all that much. The combined funds will be depleted by 2034 at the projected rate of spending.
The important thing to understand, though, is that these two trust funds aren't the only sources of income for Social Security. Payroll taxes generate most of the money used by the program. Even if the combined trust funds are exhausted, ongoing payroll taxes will be enough to fund around 80% of benefits.
This certainly isn't a great scenario for Social Security recipients. However, the outlook isn't nearly as bleak as some think.
A potentially brighter future
The future for Social Security could potentially be brighter. No benefit cuts will be required if additional revenue is generated for the program.
There are several possible alternatives that politicians could choose to protect Social Security benefits. One is to increase the payroll tax cap. Currently, any income over $160,200 isn't subject to the payroll tax that helps fund Social Security. In his 2020 presidential campaign, Joe Biden proposed also taxing any income above $400,000. This change would address 64% of the projected shortfall, according to Social Security's actuaries.
Another plan is to eliminate the payroll tax cap altogether. The Social Security Administration (SSA) estimates this change would reduce the projected shortfall by around 75% if done immediately.
Is there any reform that would fully preserve Social Security benefits all by itself? Yes. SSA projects that increasing the payroll tax rate from 12.4% (half of which is paid by the employer and half by the employee) to 16% would generate more than enough revenue to fully fund Social Security over the long term.
Other ideas to bolster Social Security by reducing costs would impact future retirees, but not current ones. The full retirement age (FRA) was gradually increased in the past to 67. Some advocate implementing another gradual increase -- perhaps by one or two months per year -- until the FRA reaches 69.
Congress could still act
The reality is that Social Security is in trouble, but it's not going bankrupt. Don't be surprised if the U.S. Congress takes action at some point within the next few years to prevent benefit cuts from happening.
But there's another truth about the present and the future of Social Security you shouldn't be surprised about, either: The program wasn't designed to provide 100% of retirement income. Regardless of what changes to the program might come, it's important to save as much as possible for retirement through IRAs, 401(k) plans, or other retirement plans.
