The Social Security program is in trouble. Not imminent trouble, but trouble nonetheless.
The most recent report from the committee in charge of the Social Security trust funds estimates that the fund underlying retirement benefits, the Old Age and Survivors Insurance Trust Fund, will be depleted by 2034.
Given the political sway of retirees, it's safe to assume that Congress won't allow this to happen. But to prevent it will inevitably require change.
What will these changes look like? Here are three possibilities.
1. Increased income taxes on benefits
The fundamental problem facing the OASI fund is that there will soon be less money going into it than is paid out to beneficiaries.
One way to address this imbalance is to boost the amount of money collected via income taxes on current benefits, as all of this revenue is cycled back into the OASI fund. This, in fact, was the impetus for the 1983 decision to tax Social Security benefits in the first place.
It goes without saying that increasing taxes in this way would be a politically unpopular move. It also goes without saying that doing so would put unfair financial pressure on current Social Security beneficiaries.
According to the Social Security Administration's website, "Among elderly Social Security beneficiaries, 22% of married couples and about 47% of unmarried persons rely on Social Security for 90% or more of their income."
2. Higher full retirement age
Given the general (and in this case, understandable) aversion to higher taxes, Congress could choose instead to tweak the other side of the ledger -- that is, the expenditures.
One method that has been used in the past is to increase the full retirement age. This is the age at which you're entitled to 100% of your primary insurance amount.
The impact would be twofold. First, because 62 remains the most prevalent age for Americans to claim benefits, it would decrease the size of the average beneficiary's monthly check. Benefits are actuarially adjusted downward if you elect to receive them before reaching full retirement age:
And second, given a larger downward adjustment, it seems likely that some retirees would choose to wait longer before applying for their own checks. The net result would be fewer and smaller checks going out at any given time.
3. Increased maximum earnings threshold
A third way for policymakers to address the coming imbalance in the OASI fund is to increase the amount of tax revenue collected from current payees.
At present, the typical American pays 12.4% on a maximum of $117,000 of taxable income to the Social Security system -- though for most people this burden is shared equally with an employer.
Consequently, policymakers could either increase the rate, which seems unlikely, or adjust the maximum threshold by raising or eliminating it.
Changes are coming
It's impossible to predict precisely what the future holds for the Social Security system. But one thing that isn't hard to predict is that things will change -- and, at least on the individual level, not for the better.
The good news is that the people who are likely to be affected the most -- namely, workers who will become beneficiaries a decade or more into the future -- still have time to compensate by making a concerted effort to increase their savings and invest prudently.
These aren't easy things to do. They require short-term sacrifices. At the same time, however, you can rest assured that the long-term payoff will be well worth it.
