The Social Security program has been facing financing issues for some years now, however, it appears that the matter is worsening with the passage of time and if Congress does not intervene soon, millions of beneficiaries will likely see a significant cut to their benefit amounts in the near future.
The latest annual report from the Social Security Board of Trustees has confirmed that the long-term finances of the program are not looking too good with estimates showing that the Old Age and Survivors Insurance (OASI) trust fund is set to be depleted by 2033 if no change in enacted now.
“Lawmakers have many options for changes that would reduce or eliminate the long-term financing shortfalls. Taking action sooner rather than later will allow consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare,” the trustees wrote in a message to the public.
As such, if Congress does not take immediate action, beneficiaries could see their benefits cut by up to 20% in order to keep the program solvent. Here is what you need to know.
Social Security projected shortfall moves up by a year
The Social Security program has three sources of funding through which benefits are paid:
- Social Security payroll taxes – 12.4% of an employees wages are paid towards this
- Interest income from the OASI trust fund and the Disability Insurance (DI) trust fund
- Taxes paid by beneficiaries on Social Security income exceeding certain thresholds
According to the trustees’ report, it is the OASI trust fund — which is used to pay benefits to retirees and survivors — in particular that is now in trouble. Estimates from the report are showing that the OASI trust fund will be depleted by 2033 and following this, the remaining revenue in the program would only be able to cover 77% of all scheduled benefits. The DI trust fund is projected to be able to continue paying out 100% of scheduled benefits until 2099 which is the end of the report’s projection period.
The report then goes on to hypothesize that if the OASI and DI trust funds were combined into one OASDI trust fund, 100% of scheduled payments would be covered only until 2034. Going forward from this point, the remaining revenue would only cover 81% of scheduled benefits.
The previous year’s report projected that the OASDI trust fund would cover all scheduled payments until 2035. This means that the shortfall has moved up a year when compared to last year’s estimates and as such, combining the two trust funds will not likely be a feasible idea. The report also notes that “the two funds could not actually be combined unless there were a change in the law, but the combined projection of the two funds is frequently used to indicate the overall status of the Social Security program.”
Potential 20% cut to benefits
As required by law in order to allow the Social Security program to maintain solvency, a 20% cut to benefit payments may come into effect as soon as the end of the current year if Congress and lawmakers do not bring forward a solution to prevent this shortfall. Experts are also warning that failure to take action now “could trigger broader economic consequences, including increased poverty rates among seniors and intensified financial stress for millions of American households.”
Whilst proposals to create a new investment fund, or increase payroll taxes have been brought forward, nothing has officially been submitted to Congress yet despite ongoing discussions and debates regarding the matter. If the 20% benefit benefit decrease does ultimately come to pass, the people who will feel its effects the most are an already vulnerable group, such as, retirees, disabled individuals, survivors, and dependents. As such, financial advisors are recommending these individuals either build an emergency fund, review their budgeting plans, or contact legislators.