There have been a lot of media reports recently with headlines like “Social Security will be insolvent by 2033” (Washington Post 9/3) and “Social Security won’t be able to pay full benefits by 2034” (CNN, 9/1). All of these scary headlines have resulted from the recent release of the 2021 Annual Report from the Trustees of the trust funds that underlie the benefits paid by the program. Before you panic, let’s unpack what the report actually says and what it means. If you want to read the summary for yourself: https://www.ssa.gov/oact/trsum/
We have to understand a critical fact about the Social Security program, the vast majority of retirement benefits are paid for directly from the taxes collected from current workers. In this way, it is a pass-through system. The SSI taxes collected from today’s workforce pay for most of the benefits received by current retirees. But there is a gap. In the past when the current taxes collected exceeded benefits paid, those excess taxes built up in the “trust fund” and that fund now pays for any gap between taxes and benefits.
So, the first key point – when the report says the trust fund will be depleted by around 2034, that doesn’t mean benefits go to $0, it means there is nothing to fund the gap so benefits would have to drop to match current taxes. If nothing happens, benefits would drop by about 24% across the board. Granted, that wouldn’t be fun for those receiving benefits but unlike the headlines infer, benefits don’t go away, they are just reduced.
AND, this also assumes that Congress does nothing. While that is a pretty darn good bet on most things, I actually think it is a losing bet this time. Congress WILL act; they have to politically. Seniors vote more than any other age block and cutting your most active voters’ SSI benefits by 24% through inaction will almost surely get you fired! It is a lock that Congress will do something, but what?
There are only two ways to solve this problem. Either you raise taxes or you cut benefits on either current or future retirees. I suspect they’ll do a little of both. There are several simple proposals that garner quite a bit of public support when polled that ultimately extend the life of the trust fund by decades.
Raise payroll taxes on high income earners. Currently, there are no SSI taxes paid on earnings over $142,800. Congress could raise this limit, reinstate taxes on incomes over $400K, eliminate the cap entirely, etc. Plenty of ways to slice it, but all result in more taxes which reduces the draw on the trust fund.
Adjust claiming ages to reflect longevity. Years ago, the full retirement age (FRA) was raised from 65 to 67, but the early-claiming age of 62 was left in place. Congress could raise the FRA or the early-claiming age to continue to reflect the fact that people are living longer. Either of these options reduces total benefits paid out and reduce the draw on the trust fund.
Adjust benefits based on your means. There are several proposals that insert some form of means testing, including options to reduce/cap benefits for wealthy retirees or by only giving cost-of-living adjustments to lower- and middle-income benefit recipients. Either proposal reduces total benefits paid out and reduce the draw on the trust fund.
Remember that when Congress does act, it will likely stage the changes in over time, just like they did when the retirement age was raised. In this way, we can all plan for how the changes impact us and our kids.
Bottom line, Social Security isn’t going away and while some action is needed, the recent headlines are trying to grab your attention. Make no mistake, Congress needs to do something, but there are some simple, relatively popular options to extend the life of the SSI trust fund. We just need our politicians to actually get something done.