For over a decade, experts have warned that Social Security is heading toward a financial turmoil. As early as 2010, there were projections that showed the trust funds would run out by 2050. Recently, a serious warning has been confirmed indicating that Social Security may drop to just 80% of scheduled benefits by 2035, and this could have a huge impact on your retirement.
The projections, from multiple government reports, indicate an urgent issue that could affect millions of Americans who rely heavily on Social Security. The 2024 Annual Trustees Report also confirmed that Social Security might be insolvent by 2025.
If that happens, retirees and other beneficiaries could endure significant cuts in benefits. Although estimates vary slightly depending on economic conditions and inflation, most of them indicate that benefits will decrease. According to independent researchers, like the Pew Research Center, benefits will fall to 79%. The Social Security Administration puts the number at 83%.
These estimates indicate a critical occurrence because over 70 million Americans currently rely on Social Security, and nearly half of retirees depend on it as their main source of income. For 20% of retirees, Social Security is their only income.
Cause of the Shortfall
One of the major factors causing the shortfall is the declining birth rates. This is contrary to the popular belief that it’s because of aging baby boomers. The declining birth rates mean that there will be fewer future workers paying into the system. Additionally people are living longer and drawing benefits for more years than in the past. This is causing a growing imbalance where more money is going out while less is coming in.
The 2024 Trustees Report notes that despite improvements in the job market and economy at large, which have boosted contributions, the long-term outlook is still uncertain. Without legislative action, Social Security will simply run out of funds and be unable to pay benefits after 2035.
Who will be Affected?
If Social Security drops to 80% benefits as projected, the following groups of people will be affected:
- Retirees who claim benefits at age 62 will see smaller checks.
- People with disabilities, including those who have paid into the system for years, are also affected.
- Spouses, children, and grandchildren who receive survivor or dependent benefits are also impacted.
A report by the Urban Institute estimates that if the trust fund runs dry, the number of retirees living in poverty could increase by over 50%. This would be discouraging, considering that the program is designed to prevent senior poverty.
What Can be Done?
Although there is no consensus yet, here are the options that Congress has on the table:
- Lifting the payroll tax cap so that high earners pay more. Currently, only wages up to $168,600 are taxed for Social Security.
- Increasing the full retirement age (FRA) to 68 or 70.
- Reducing benefits for high-income retirees. This is a controversial option that would lower or eliminate benefits for wealthy retirees.
- Boosting the trust fund directly by injecting additional federal dollars into the Social Security trust fund.
Martin O’Malley, former Commissioner of Social Security, urged Congress to extend the solvency of the trust fund, as it has done in the past on a bipartisan basis.
“Eliminating the shortfall will bring peace of mind to Social Security’s 70 million-plus beneficiaries, the 180 million workers and their families who contribute to Social Security, and the entire nation,” O’Malley said.
Conclusion
It is clear that Social Security may drop to 80% of benefits in 2025, and this could have devastating consequences, especially for retirees. Although the recent trustees’ report gives the system an extra year of solvency, there is still not enough time.
AARP (American Association of Retired Persons) and other advocacy groups are urging lawmakers to solve the issue on a bipartisan basis. Some of the possible solutions involve tax reforms, benefits adjustments, or an extension of the retirement age.