Before the Social Security program reaches its hundredth year in operation, a major trust that supplements the revenue used to pay benefits to Social Security recipients is projected to become insolvent — unless Congress intervenes in the present. If no change is made to the program now and the projected shortfall does come to pass, beneficiaries will be looking at hefty cuts to their benefits less than a decade from now.
According to the Social Security Administration’s (SSA) latest monthly statistical snapshot, benefits are being paid to around 74 million beneficiaries, many of whom could be relying primarily or solely on their monthly benefit income to cover their living expenses. For these vulnerable individuals, a cut to benefits of any degree could very well result in severe financial hardship.
As such, many individuals who are retired or nearing retirement are now beginning to fear that the program might not be around long enough to support them during their sunset years. Furthermore, a recent survey has found that over 50% of Social Security recipients would be at high risk financially if cuts to benefits are enacted. Here is what you need to know.
Social Security annual report
According to the latest annual report from the Social Security Board of Trustees, the Old Age and Survivors Insurance (OASI) trust fund is projected to become insolvent by 2033 if no change is enacted to the program now.
The Social Security program has three sources of revenue through which benefits are paid, with the dedicated Social Security payroll tax being the primary source of revenue. This revenue is supplemented by funds from the OASI trust fund and the Disability Insurance (DI) trust fund.
The DI trust fund is projected to remain 100% solvent until 2099, unlike the OASI trust fund. If the OASI trust fund becomes insolvent, the remaining revenue in the program will only be sufficient to cover 77% of all scheduled benefits, meaning an automatic cut will be triggered.
However, the trustees also propose the possibility of combining the two trust funds into one OASDI trust fund. If combined, “the resulting projected fund (designated OASDI) would be able to pay 100 percent of total scheduled benefits until 2034, one year earlier than reported last year. At that time, the projected fund’s reserves would become depleted, and continuing total fund income would be sufficient to pay 81 percent of scheduled benefits.”
The combining of the two funds would require a change in law, however, hypothetically speaking, if the funds are combined and the shortfall is still reached in 2024, a 19% cut will automatically be triggered to all benefits. This would translate to a loss of $4,573 each year for seniors.
Survey findings
A recent Nationwide Financial Survey has revealed that “more than half of Social Security recipients wouldn’t financially survive if they missed even half of a monthly payment.” If a solution to the projected shortfall is not found and the 19% cut to benefits is indeed triggered, it appears that a majority of Social Security recipients will have to face a drastically lowered quality of life.
The survey polled 1,800 U.S adults, 14% of whom “strongly agreed that they wouldn’t be able to survive a missed payment,” while 30% “somewhat agreed.” Additionally, 74% agreed that, “they were worried about Social Security benefits running out at some point in their lifetime,” and 83% “expressed concerns over the SSA’s long-term viability.”
The depletion of the trust funds has accelerated due to an increased reliance on its funds to pay out benefits. The revenue from the Social Security payroll tax is no longer enough to support the growing number of retirees. This is because the ratio of new workers to retirees is extremely disproportionate, with more seniors retiring and less young workers entering into the workforce and paying into the dedicated payroll tax.
A Cato Institute report also found that, “young workers will see a reduction equivalent to $110,000 of their lifetime earnings due to higher taxes and/or reduced benefits.”