Retirees could be in for a rude awakening in the near future unless Congress makes some changes to Social Security.
The most recent Social Security Trustees Report indicated the Old-Age and Survivors Insurance (OASI) trust fund will run out of money by 2033, according to base-case projections. If nothing is done, it will only have enough incoming cash from taxes to support paying approximately 79% of benefits from that year on. Around 70 million people will see their benefit check shrink as a result.
Combining the OASI trust fund with the disability insurance (DI) trust fund offers only a bit of relief. The report shows the combined fund running dry by 2035, at which point it could only support 83% of expected benefits.
The projection is an improvement from last year. While the report still expects OASI trust fund depletion by 2033, it expects that improved worker productivity will support 79% of benefits instead of just 77%. But an extra 2 percentage points might not be much solace to seniors relying on their monthly benefits.
Here's what's going on, and what can be done to resolve the issue.
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Why is Social Security running out of money?
For a long time, Social Security had more money coming into the program from taxes than it was paying out in benefits. That was fueled by strong population growth and economic expansion. The extra money was held in a trust fund and invested in special U.S. Treasury bonds.
As baby boomers retire and life expectancies rise, total benefits paid out have increased. Meanwhile, generations with lower birth rates have replaced the boomers, resulting in slower growth in workers paying into the system than retirees receiving benefits. As a result, retirement benefits paid have exceeded taxes received for that part of the program since 2018.
But that's what the trust funds are for. The program can pay out the difference with money from the funds. Last year, the Social Security Administration (SSA) took $70.4 billion out of the OASI trust fund to pay for retirement benefits. It still had $2.64 trillion left at the end of the year.
But the drawdown rate will accelerate over the next decade as more people start collecting benefits and the growth in the workforce can't keep up. That will leave the OASI trust fund with nothing by 2033. At that point, the money coming in from taxes will only support a fraction of the benefits due to retirees.
How can the Social Security program avoid a benefits cut?
There are several proposed solutions for salvaging the Social Security program and ensuring current retirees don't see a cut in benefits.
President Joe Biden's administration proposed a payroll tax on income above $400,000. Currently, workers pay Social Security tax on only the first $168,600 in wages received each year. That number is adjusted for inflation every year.
Biden's proposal would require workers to pay added Social Security tax on any wages above $400,000. The SSA actuaries expect such a law could extend the life of the combined trust fund by another eight years, to 2043.
Another possible solution is to increase the full retirement age for current workers. That would preserve benefits for current retirees but cut benefits for those still working. However, all proposals explored by the SSA actuaries provided minimal short-term benefit to trust fund depletion.
It's possible that Congress simply allows Social Security to run a deficit. Other government programs run at a deficit propped up by debt; allowing Social Security to do so gives Congress more time to overhaul the program to ensure it becomes solvent once again in the future. What's more, it would allow Social Security to continue to pay out 100% of benefits.
None of these solutions is perfect, and perhaps a combination of several measures will be necessary. Congress needs to do something to ensure minimal benefits cuts for retirees; otherwise, 70 million Americans will find their monthly Social Security checks slashed in less than a decade.
