Because so many older Americans rely heavily on Social Security to make ends meet, the idea of the program going broke is incredibly scary. Thankfully, though, that scenario is not on the table.
Social Security can't run out of money, simply because it gets most of its revenue from payroll taxes. So as long as there's an active labor force, the program can continue to exist.
Image source: Getty Images.
That said, Social Security is facing a funding shortfall that could result in benefit cuts. And the timing of that shortfall just got a little worse.
We could be less than a decade away from sweeping cuts
Even though Social Security is continuously funded by payroll taxes, in the coming years, as baby boomers retire in droves, that revenue stream is expected to shrink. And it won't provide Social Security with enough income to keep up with its payment obligations.
Social Security can use its trust funds to keep paying benefits while the money is still there. But once those trust funds are emptied, benefit cuts will be on the table.
Meanwhile, the Social Security Trustees just released their annual report, and it found that the program's trust funds may be depleted sooner than expected. That's not good news.
The Old-Age and Survivors Insurance Trust Fund could be empty by 2033, at which point only 77% of Social Security benefits would be payable. The Disability Insurance Trust Fund could be empty by 2034. From there, 81% of the combined benefits would be payable by Social Security. But that's a pretty serious pay cut for seniors.
As it is, many seniors struggle to cover their expenses on Social Security. If benefits are slashed, retirees could be in for a world of financial pain.
How likely are Social Security cuts actually?
This isn't the first time in Social Security's history that the program has faced the possibility of benefit cuts. And in the past, lawmakers have managed to come up with solutions for preventing them.
But it's hard to say whether Social Security cuts will be preventable this time around. While there are potential solutions, each one introduces a different sort of problem.
Some lawmakers have suggested raising the Social Security tax rate. Currently, that tax rate is 12.4% on wages up to a certain cap, split evenly between employers and employees (though self-employed people pay the entire 12.4%). Lawmakers could increase that tax rate, but that would clearly burden working Americans.
It's also possible to raise or eliminate the Social Security wage cap so that higher earners pay into the program on more of their income. The problem, though, is that Social Security is designed to reward people who put more money into the program with larger benefits. If the wage cap is lifted and the program's maximum monthly benefit stays the same so there's a net financial gain, it changes the nature of Social Security.
There's also the possibility of pushing full retirement age back a year or two. Right now, it's 67 for anyone born in 1960 or later. That change, however, could force many working Americans into a later retirement than what they want or can handle physically.
Lawmakers can't just sit on their hands
The fact that Social Security is facing cuts in less than a decade demands lawmakers' attention. And at this point, it's a situation that needs to be prioritized.
It's very possible to prevent Social Security from cutting benefits -- but only if lawmakers act quickly. Given what's on the line, we can only hope that they'll manage to beat the ticking clock and spare Social Security recipients a world of financial pain.
