The latest report on the financial status of Social Security shares some disturbing news. Under its current funding system, Social Security won't have enough money to cover full benefits starting in 2035. According to projections, the funding shortfall in that year, and thereafter, is 20%.
There is good news about Social Security
The projections in question come from an annual report published by the Social Security and Medicare Boards of Trustees. This year's report shows an improved funding outlook vs. last year. Last year, projections estimated a shortfall starting a year earlier, in 2034.
Legislators, then, have one more year to implement a fix. And the trustees report is clear on this: Social Security's funding problem can be resolved before 2035. Specifically, the report states, "Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls."
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Lawmakers are likely to act, eventually. The alternative is forcing millions of seniors to absorb double-digit benefit cuts. That would be political suicide, given that it would immediately increase the number of American seniors living in poverty. Among the 46.7 million retired workers who received Social Security in 2021, 37% of men and 42% of women counted those benefits as their largest source of retirement income.
In addition, the population of Americans over the age of 64 will grow from 57 million in 2021 to 76 million in 2035. That's a massive number of voters who will be furious if lawmakers do nothing.
Why Social Security funding is running low
Social Security has two primary funding sources: two trust funds and income collected through payroll taxes. The two trust funds are the Old-Age and Survivors Insurance (OASI) Trust Fund, earmarked for retirement and survivor benefits, and the Disability Insurance (DI) Trust Fund, earmarked for disability benefits.
The trust funds are in place to smooth out the ebbs and flows of tax income relative to Social Security's costs. When tax income is higher than program costs in a given year, the excess goes to the trust funds. When tax income is lower than program costs, the trust funds cover the difference.
Changing demographics underpin the problem Social Security is facing. A large population of seniors will retire over the next 10 to 15 years. As they retire, they stop funding Social Security via their paycheck, and they start receiving benefits instead. Cumulatively, this shift raises costs and reduces income for Social Security as a whole.
The trust funds normally pick up the slack, but the projected imbalance is great enough to deplete the trust fund reserves. That's what's projected to happen in 2035. Both the OASI and DI funds combined will dry up.
With no reserve funds available, Social Security must run on tax income alone. This is where the 20% shortfall comes in. Projections show that tax income can cover 80% of benefits in 2035. That coverage level dips to 74% of benefits in 2096.
How to protect your retirement
Given the uncertainty around how Social Security will evolve over the next 15 years, it's smart to be conservative about your retirement funding plan. If you're still working, now's a good time to increase your 401(k) or IRA contributions. The more you save, the easier it'll be to absorb any modest benefit changes.
To put things in perspective, the average Social Security benefit today is $1,536.94 monthly. A 20% reduction would lower that number to $1,229.55. The difference is about $310 per month or $3,720 per year. You could cover that by adding $93,000 to your retirement account, assuming you withdraw 4% per year.
If you're already retired, you might explore ways to raise your income and/or lower your living expenses. A part-time side hustle might be a fun way to generate some extra cash. You could also look at downsizing or moving to a state with a lower cost of living. Either move would strengthen your finances and improve your long-term solvency.
Social Security: Down but not out
Social Security has a funding issue brewing, but it's too soon to declare disaster. If you're still working, your best move now is to save more, just in case. If you're already retired, make your contingency plans. In matters of finance, it never hurts to have options -- even if this Social Security problem later becomes a non-issue.
