Social Security has been a financial safety net for many retired and disabled Americans, however there are multiple concerns about how the program will sustain itself. A new report by the Cato Institute warns that without any changes, today’s young workers could lose up to $110,000 in lifetime earnings just to keep the program running.
Why Younger Workers Are Paying the Price
The Social Security Trust Fund is expected to be depleted by the mid-2030s, and younger generations are being asked to carry a heavier financial load. The root issue lies in the aging population as baby boomers are retiring in high numbers, while the number of working-age Americans paying into the system is shrinking.
If Congress doesn’t act soon, the Social Security Administration (SSA) would only be able to pay about 80% of scheduled benefits. To fill the massive funding gap, younger workers might face either higher taxes or reduced future benefits or both.
According to Cato’s estimates, this could lead to a lifetime income loss of $110,000 for new entrants into the workforce. That figure arises from the need to increase the payroll tax rate from 12.4% to 16.05%, a 3.65% increase, to stabilize the system over the long haul.
The Ripple Effect of Higher Taxes
Experts are warning that this kind of tax hike won’t just impact future retirement, it could affect day-to-day living right now. Kevin Thompson, CEO of 9i Capital Group, told Newsweek that more taxes would mean less take-home pay and reduced discretionary spending, which could slow economic growth.
The Cato Institute notes that the cost of saving Social Security could be equivalent to giving up about 20 months of pay over a worker’s lifetime. And that’s just if the tax solution is the only path taken. Other ideas are also being floated, but each comes with its own trade-offs.
What Solutions Are Being Considered?
Financial experts agree that preserving Social Security will require a combination of solutions. According to Drew Powers of Powers Financial Group, this might include changes to payroll tax rates, adjustments to the income cap, and even changes to the full retirement age. He added that we might also see the return of the Retirement Earnings Test or the introduction of means testing for retirees who are wealthier.
Even though none of these options are gaining popularity, there are many Americans who are open to sacrifices, especially among higher earners. A University of Maryland survey concluded that 53% of Americans support reducing benefits only for the top 40% of income earners, this move could close about 23% of the funding shortfall.
Another solution is to increase the retirement age. Even though this may seem controversial, this idea has bipartisan support and could address around 15% of the gap, according to the same study.
Public Sentiment Is Shifting
Regardless of the many years of being warned, Americans have always thought that Social Security will always be there.
Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, noted, “There’s been an assumption made by Americans for decades now, and that is regardless of warnings and political posturing, Social Security will always be there to provide for retirees. The reality is there’s a tremendous shortfall coming in the next decade, and if Congress doesn’t act, beneficiaries will see their monthly payments dramatically reduced.”
The younger generation such as Millennials and Gen Z are requested to prepare for a different version of Social Security that may likely be very different from the one their grandparents relied on.
What Comes Next?
Even though no official measure has been implemented yet, the public are getting increasingly concerned. It is important to stay informed and plan for multiple scenarios.