For years, Americans have been warned that the Social Security fund is at risk of becoming insolvent soon. Now, new government projections are pointing to a clear deadline that will determine whether future benefits will rise or even get slashed. According to the newly released data, failure to act before the deadline could affect retirement plans for tens of millions of Americans.
Average Benefits Are on Track to Hit $3,000 but Only If the System Survives
Currently, the average monthly Social Security check is $2,080. However, due to the trend of the annual cost-of-living adjustment (COLA), the average payment is projected to reach $3,038 by 2040.
These projections highlight what Douglas A. McIntyre calls “the power of compounding.” Additionally, they prove that Social Security benefits can keep pace with inflation. However, that optimistic projection is only possible if Congress acts on solving the insolvency crisis surrounding the Social Security fund.
The Government’s Deadline
The government has projected that the combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds will be depleted by 2034. In 2034, beneficiaries may experience across-the-board cuts. However, this scenario could be avoided if Congress decides to solve the issue.
By then (2034), the average check would reach $2,508, but the government would only be able to pay out around 80% of the benefits. This means that beneficiaries would have to endure a 20% benefit cut. If this happened, many retirees would end up in financial crisis, especially given the rising cost of living.
Why Social Security’s Funding Is Under Such Pressure
The Social Security fund is under pressure due to demographic and financial pressures. The Social Security trust fund is currently paying more than it is bringing in, and the deficit is ballooning. The trust fund is currently at $2.7 trillion, and the balance is continuing to shrink. Last year alone, the fund decreased by 3.6%, and the losses are accelerating.
Here are the two reasons why the Social Security fund is shrinking:
a) The “Silver Tsunami” Is Hitting Full Force
The baby boomer generation is reaching retirement in massive numbers. Additionally, they are living longer than previous generations. This means that every year, more people are enrolling into the Social Security system and earning from it for more years.
b) Not Enough Workers Are Paying In
In 1960, for every one worker relying on Social Security, there were 5.1 workers supporting them. Today, only 2.7 workers are supporting one retiree, and by 2035, it is projected that the figure will drop to 2.3. In other words, few workers are contributing money into the Social Security fund, yet there are more people retiring and collecting benefits for many years. This formula simply results in a deficit.
For Social Security to remain solvent, Congress must agree on how to replenish the trust fund. According to McIntyre, Social Security requires as much as $1 trillion in 2034.
What Happens If Congress Misses the Deadline
If Congress fails to act by 2034, beneficiaries will see their benefits get reduced by around 20%. For many retirees, that will be financially devastating. It would also affect the economy since lower benefits would mean reduced spending, weaker local economies, and increase reliance on social safety-net programs.
Additionally, the projected $3,038 per month by 2040 would be impossible. This would mean that future retirees would remain locked in a much lower standard of living.
The Path Forward Is Clear but Politically Difficult
To fix Social Security, here are the options that should be considered:
- Raising the payroll tax rate
- Increasing or eliminating the income cap on taxable wages
- Adjusting benefit formulas
- Injecting general revenue into the trust fund
- Raising the full retirement age
Unfortunately, each of these options is politically divisive. But the math is unavoidable and Congress has to confront decisions that have been avoided for decades.