If you're not keeping an eye on the health of the Social Security program, you may be in danger of overestimating how much you'll receive from the vital program in retirement. Many scary headlines overstate how worrisome the situation is, but there is cause for worry.
Fortunately, Social Security's problems can be fixed in a variety of ways. But one proposal has received bipartisan opposition from Americans.
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Social Security's coffers are shrinking
As you probably know, Social Security works like this: Employed people pay taxes on their earnings into Social Security's coffers, and beneficiaries (mostly retired folks) are paid the benefits due to them from those coffers. That system has worked quite well for decades, but there's trouble ahead.
Over time, Americans have been living longer, and many have been retiring earlier. So relatively less money has been going into the coffers, while more has been paid out of it. Whereas Social Security ran a surplus for many year, it's no longer doing so. Instead, it's drawing on its reserves.
According to the Social Security Administration's (SSA's) 2023 summary of the Actuarial Status of the Social Security Trust Funds, in 2022, total inflows were $1.09 trillion, while outflows totaled $1.15 trillion, reducing reserves by around $54 billion.
The Social Security Board of Trustees issues an annual report on the state of Social Security, and its latest one notes that the Old-Age and Survivors Insurance Trust Fund (i.e. Social Security's coffers) is now "projected to become depleted in 2033, a year earlier than in last year's estimate..."
At that point, Social Security won't have to stop paying benefits, but it may have to pay beneficiaries less than they're owed. The latest estimate is that they'll face a 23% cut in their benefits, receiving about 77% of what they're due.
Ways to fix Social Security
That grim scenario is what faces us if Congress doesn't strengthen the program. But Congress can reverse the scenario. One of multiple ways that Congress can address the looming shortfall is to start having workers taxed on all their income. Right now, only our earnings up to $160,200 are taxed, so someone earning $160,200 and someone earning, say, $5,160,200 will pay the same in Social Security taxes. Clearly, if every earned dollar were taxed -- as is the case for most non-wealthy workers -- more money would flow into Social Security.
Another option is hiking the tax rate we pay for Social Security a bit. Even a small increase can generate a lot of money for the program.
One more possibility is, instead of aiming to bring more money into the program, to restrict how much is paid out of it -- for example, by raising the full retirement age -- the age at which we're eligible to start receiving the full benefits to which we're entitled, based on our earnings history. Right now it's 66 or 67 for most workers, and 67 for those born in 1960 and later.
Some politicians have suggested raising the full retirement age to age 70 -- and this option is far less palatable to many Americans than other proposals. Per a 2023 Quinnipiac University national poll of adults, fully 78% of respondents are opposed to raising the age to 70, with only 17% in favor of it.
What to do now
Given all that, what should we do? Well, the safest thing to do is to hope for the best while preparing for the worst. It's reasonable to expect Congress to shore up Social Security one way or another, since so many millions of retirees depend on it for a big chunk of their income. (As of June, nearly 50 million retirees were receiving benefits, with those benefits making up about 30% of the income of the elderly in America.)
So be sure to take time to develop a thorough retirement plan, determining how much income you'll need in your later years and how you'll amass it. For context, know that the average monthly Social Security retirement benefit was only $1,840 as of August -- about $22,000 annually.
Finally, if you feel strongly about Social Security and its future, consider contacting your representatives in Washington to share your thoughts.
