The Social Security program has long been facing financing problems, however, the latest annual report from the Social Security Board of Trustees shows that the timeline for a major trust fund to reach insolvency has moved up a year and if Congress does not intervene now, millions of vulnerable Americans could soon see their benefit checks slashed by a significant amount.
Fortunately, the trust funds are not the sole nor the primary source of funding for the program, however, if they do happen to reach depletion as per the report’s projections, the remaining revenue will only be able to cover 77%-81% of all scheduled benefits. As a result, the monthly benefit income for millions could be hit with a decrease of up to 23%.
Some potential solutions to prevent this projected shortfall have since been brought forward by lawmakers, however, nothing has been officially submitted to Congress as yet. Here is everything you need to know.
Projected shortfall of Social Security trust funds
The Social Security program is has two main sources of funding: a dedicated payroll tax to which workers contribute a percentage of their earnings, and two main trust funds. Beneficiaries earning above a certain threshold also have to pay taxes on their benefit income and this tax contribution is also put towards funding the program.
There are two main trust funds, the Old Age and Survivors Insurance trust fund (OASI), and the Disability Insurance trust fund (DI). According to the projections in the report, the OASI trust fund is estimated to reach depletion by 2033. At this point, the remaining revenue would only be sufficient to cover 77% of all scheduled benefits going forward from that point, meaning that beneficiaries could lose 23% of their monthly benefit income.
The average benefit check crossed over the $2,000 threshold for the first time in the history of the program in May. Assuming a beneficiary is earning the average benefit amount, if the OASI trust fund shortfall comes to pass, the check will drop from $2,000 to around $1,540. Losing almost $500 from your monthly income could have severe repercussions on these households, particularly if their benefits are the main or sole source of income.
The report also puts forward the hypothetical scenario of combining both trust funds into one OASDI trust fund which would then be able to pay all scheduled benefits only until 2034 (a year earlier than the previous year’s projections). Following this, the remaining revenue will only be able to cover 81% of all benefits going forward.
Additionally, the percentages by which benefits will be cut if Congress does not act soon could grow further due to the passing of the One Big Beautiful Bill Act which includes changes to policies regarding the tax paid on benefits as well.
Proposed solutions
In addition to the recent changes in taxes and laws, the program’s growing funding problem can be largely attributed to the fact that the senior population who are beginning to claim benefits is growing a lot faster than the younger population of workers who are paying into Social Security payroll taxes. As a result, the shortfall date for the program appears to be advancing with each passing year.
With the hope of preventing the projected shortfall, two senators brought forward the proposal to create a new investment fund. In theory, this could potentially increase revenue, however, it requires a start-up cost of $1 trillion from the Treasury to be invested in a broad portfolio over a 75 year period. Whilst this proposal could yield higher returns, the risk remains equally high.
Alternatively, there have been talks to increase the payroll tax rate which currently stands at 12.4%, to raise the payroll tax cap, or to make changes to the formula used to calculate benefits. Another option is to increase the full retirement age again. Several decades ago, the program had been amended to account for increasing life expectancy and as a result, it was decided that the full retirement age would be increased annually in two month increments until it reaches 67 (which will happen in 2026).