How will seniors retire in the future? The trust fund that supports Social Security is expected to be exhausted by 2033. That’s one year sooner than a report from 2020, which forecasted the Social Security OASI Trust Fund to be emptied by 2034.
Every year the Annual Social Security and Medicare Trustees issue a report, which outlines where the social safety net stands. In recent years, the trust fund that supports Social Security payments to millions of Americans has taken a beating.
In short, the trust fund is running out — but there’s more to it than that. It doesn’t mean monthly payments will disappear for current retirees. However, it does mean that those planning to retire in the next 20 to 30 years should plan for significantly reduced Social Security benefits.
How much will social security benefits be slashed?
The best estimates available now, if the trust fund does run dry, indicate that benefits would be reduced by 20-30%. “At that point, the law says we can only pay in benefits what we raise in taxes which means a 22% across the board benefit cut,” explained Marc Goldwein. He’s Senior Vice President of the Committee for a Responsible Federal Budget.
What does the equate to? For beneficiaries getting $20,000 currently from Social Security, the reduction would mean an annual benefit of $16,000. “It’s a pretty big reduction to happen so sharply and it and would happen to everyone,” Goldwein added.
Making matters worse, the Office of Inspector General reports that over a 12 month period upwards of $125.2 million in social security checks went out to deceased.
Why are benefits increasing in 2022 if the trust fund is going to run out?
Last week it was reported that social security beneficiaries would see the most-significant cost of living increase in decades — as a reported 6% boost would be coming in 2022. That hasn’t been formalized, but an announcement is expected in October from the Social Security Administration.
When the 6% takes effect it will translate to nearly $100 more per month for the average social security recipient.
How is all of this possible? Think of the trust fund that supports social security as a separate account from the one paying out benefits. The money collected in withholdings and taxes is what pays for benefits on a month-to-month basis, which is how benefits could increase — and continue being paid out to some degree if the trust fund runs out.
The trust fund effectively supplements the account paying benefits to keep it solvent. When the trust fund runs out — that’s when insolvency comes up.
How does it get fixed?
Congress must act. Lawmakers pushed unsuccessfully in 2019 to make changes. There are solutions to bring social security back into balance. Most inaction involves a lack of political will, though.
One option is to prevent people from claiming benefits early. While that has been a favorable play among fiscal conservatives — progressives say that it’s not the best option. They contend that raising taxes is the best means to keep the trust fund and programs solvent for decades to come.
In short, here’s how both of those options could be executed:
1) Increase penalties to those who claim benefits early — encouraging recent retirees to wait longer for social security. This would be one way to save money in the program without increasing the tax burden to sustain it.
2) Increasing taxes never sounds like a good idea on paper, but it could be necessary as more people retire early. It’s also the favored option for those who want to see benefits unchanged. One proposal would be to increase the tax from 12.4% to roughly 16%. Another option would be the eliminate the wage cap, which currently sits at $142,800. Don’t worry — even if this scenario played out — under current rules employers and employees would split that total tax, which would mean the withholding on a working age person would be approximately 8% of earnings.
Are there any proposals being considered now in Congress to address Social Security?
A bill recently introduced would prevent beneficiaries from living in poverty. Democrats are pushing for the lowest earners in the Social Security system to earn more.
This would happen by increasing Supplemental Security Income benefits. Many say that this would be an easier fix to the dollar amount issue associated with seniors living primarily off of social security income.
Eliminating the wage cap [mentioned earlier] is a major component of covering the cost of this enhancement to the program, which would establish a ‘floor’ for beneficiaries.
“My proposal would help us ensure that Social Security does what it was intended to do: protect all older Americans from spending their retirement living in deep poverty,” the bill’s sponsor Rep. Gwen Moore, D-Wisconsin, said after its introduction.
An issue with the structure of this proposal is that it would only apply to new beneficiaries — instead of the millions claiming Social Security benefits now.
There are no current bills actively being debated to save the trust fund that supports Social Security.