Social Security is on a collision course with insolvency. That's one thing that everyone on Capitol Hill agrees upon.
But there are lots of areas of disagreement when it comes to Social Security. How to fix the program tops the list. Even the level of the benefit reductions that could be on the way doesn't have a consensus. Here's why those potential Social Security benefit cuts could be bigger than projected.
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From bad to worse
Earlier this year, Social Security's trustees released their annual report detailing the status of the program's two trust funds -- the Old-Age and Survivors Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund. Unsurprisingly, that status didn't look great.
In their latest report, the trustees stated that the combined trust funds will be depleted by 2034. After that point, they project that ongoing sources of revenue for Social Security will be able to fund only 80% of scheduled benefits.
The prospect of a 20% reduction in Social Security benefits in a little over a decade from now is unquestionably bad news. However, the situation could be even worse.
Social Security's trustees aren't the only ones who monitor the health of the program. The Congressional Budget Office (CBO) also regularly makes projections about the long-term future of Social Security.
Last month, CBO projected that the combined Social Security trust funds will run out of money in 2033, one year earlier than the trustees' estimate. The nonpartisan agency also thinks that benefits will have to be slashed by 25% instead of 20% beginning in 2034. Starting in 2097, Social Security benefits would have to be 30% lower than scheduled benefits.
Behind the bleaker outlook
Are the CBO analysts simply the kind of people who view a glass of water not just as half-empty but also cracked and laced with arsenic? Not necessarily. However, they definitely have made more negative underlying assumptions about the future in their projections.
It's not that CBO anticipates less revenue than the Social Security trustees do. Both project that revenue for Social Security will remain between 13% and 14% of taxable payroll throughout the next 75 years. The reason behind CBO's bleaker outlook is the agency's expectations about spending.
At first, the gap between the two projections isn't all that great. For example, CBO looks for Social Security spending in 2023 to be 14.7% of taxable payroll. The program's trustees project spending of 14.5% of taxable payroll this year.
The difference between the two spending outlooks grows over time, though. By 2033, the CBO projects spending to reach 17.1% of taxable payroll. The Social Security trustees think the number will be 16.3%. Fast forward 50 years from now and the gap becomes worse, with the CBO predicting spending of 20.3% of taxable payroll versus 18.4% under the trustees' forecast.
Some good news
Are the CBO's projections more accurate than the Social Security trustees' numbers? It's hard to say. What we can know for sure is that whether the potential reduction to Social Security benefits is 20% or 25%, it will be bad news for retirees.
Ready for some good news? Those cuts -- regardless of the exact amount -- can be avoided altogether. Keeping Social Security solvent for decades to come isn't impossible.
Several potential solutions have been proposed. Some want to raise the payroll tax cap (the maximum income for which Social Security payroll taxes are applicable). Others want to gradually increase the full retirement age. There are plenty of other ideas as well.
Politicians in Washington, D.C. disagree on most things. However, there's significant bipartisan agreement that Social Security benefits should be preserved. A collision course with insolvency isn't inevitable.
