According to the latest Social Security Trustees Report, Social Security's two trust funds -- the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund -- are on track to run out of money around 2033. If nothing changes between now and when those trust funds empty, the federal program's benefits will have to be cut by about 23%.
The law isn't entirely clear on how those cuts would be implemented, but a recent report by the Congressional Research Service says there are two primary options. One option is that benefits are delayed, but full checks are issued as funds become available. The other option is that checks are paid on time but at a reduced amount.
Which is less of a problem?
If the Social Security Administration had the capacity to pay about three-quarters of expected benefits, delayed benefits with full checks might look something like this:
- January: No payment
- February: Full payment
- March: Full payment
- April: Full payment
- May: No payment
- June: Full payment
- July: Full payment
- August: Full payment
- September: No payment
- October: Full payment
- November: Full payment
- December: Full payment
The alternative -- reduced payments, delivered on the standard monthly schedule -- would result in a monthly benefit of about three-quarters of what you'd otherwise expect. According to the Congressional Research Service report, beneficiaries would still be entitled to their full benefits, and once funding was covered, past-due benefits would likely have to be paid. But that promise of future payment doesn't help with any bills that come due while lawmakers are trying to figure out how to patch the system.
In all likelihood, however, Social Security will be patched before its trust funds empty. Those trust funds have been in trouble before, and Congress has never let them empty completely. Still, prior fixes have involved some combination of tax hikes and benefit cuts. Unless lawmakers allow Social Security to adopt a different investment style that allows for higher potential returns than Treasury bonds, tax hikes and/or benefit cuts will likely be the key elements of any future fixes, too.
Would you rather pay now or wait and pay more later?
Whatever approach lawmakers ultimately agree upon, it's clear that the longer they wait, the more expensive the patches will get. As the Congressional Research Service report states, "If changes were made sooner, they could be smaller, since the burden of lower benefits or higher taxes would be shared by more beneficiaries or workers over a longer period."
To you, that essentially means:
- You will pay for a fix as a beneficiary or a taxpayer -- or both.
- The longer lawmakers wait to make that fix, the more you will pay for it.
If there's any good news on that front, it may ironically come from the fact that the Social Security Trustees expect the Disability Insurance Trust Fund to empty next year. Earlier this year, the House of Representatives passed a rule intended to force a more comprehensive repair to the program, rather than the short-term patch of shifting money from the Old-Age and Survivors Insurance Trust Fund to the Disability Insurance Trust Fund.
That rule change sets up the potential for political brinkmanship as the Social Security Disability Insurance Trust Fund dwindles over the next year or two. Still, it also offers some hope that a fix will be made sooner rather than later. If you expect to be participating in Social Security more than 18 years from now (when the combined Trust Funds are expected to empty), it's likely in your best interest to hope the newly passed rule works out as advertised.
Social Security will still offer you something
No matter the outcome of the political process, there's every reason to believe Social Security will still be there for you in 2033 and beyond. Whether it's able to deliver 77% of your expected benefits, the full benefits you hope to receive, or something in between remains to be seen.
All that said, the most important thing to remember is that even if Social Security does get completely repaired, it only replaces about 40% of a typical retiree's pre-retirement income. Be sure you're funding your overall retirement plan based on that reality. The stronger the rest of your savings plan is, the better you'll be able to handle whatever the future holds for Social Security.