Around 72 million Americans rely on the Social Security program and their monthly benefits to cover at least part of their monthly expenses. In fact, a recent study conducted by The Senior Citizens League, a nonpartisan advocacy group, has estimated that “21.8 million seniors get by on Social Security alone.” The benefit program is financed through a mix of dedicated payroll taxes and government reserves.
The latest annual report from the Social Security Board of Trustees, however, has estimated that a major trust fund reserve will be exhausted less than a decade from now if Congress does not intervene soon. If no action is taken immediately, beneficiaries will likely see their benefits cut by a significant amount in the near future in order to keep the program solvent.
A recent report from the Committee for a Responsible Federal Budget (CRFB) has determined that retirees may be facing a massive cut to their monthly benefits within the next seven years if a solution is not passed by Congress now. Here is what you need to know.
Social Security projected shortfall
According to the trustees’ report, the Old Age and Survivor Insurance (OASI) trust fund will be exhausted by 2033 and if combined with the Disability Insurance (DI) trust fund, the combined fund will be exhausted by 2034. The previous year’s report estimated that the combined OASDI trust fund would be exhausted by 2035. Following the depletion of the combined trust fund in 2034, the remaining revenue in the program would have the capacity to cover only 81% of scheduled payments.
If no solution is found to this financing issue and payroll taxes become the sole source of revenue for the program, benefits are going to be hit with a substantial 21% cut that will go into effect automatically. As a result, “a couple with medium dual income retiring in 2033 would lose $18,100 per year in benefits if the trust fund conundrum is not solved. For a single income couple, this would be $13,600,” as per estimates from the CRFB.
The benefit cut projections from the CRFB report were made assuming a 24% decrease, whilst the trustees’ report works with a 21% cut. The CRFB has used a 24% cut rate for its calculations as it takes into account new senior deductions and tax rate cuts included in the One Big Beautiful Bill Act that had been signed into law on July 4th.
“The tax rate cuts and increase in the senior standard deduction from the recently enacted OBBBA would reduce Social Security’s revenue from the income taxation of benefits, increasing the required cut by about a percentage point upon insolvency,” CRFB wrote in its report. “If the expanded senior standard deduction and other temporary measures of OBBBA are made permanent, the benefit cut would grow larger.”
Proposed solutions
Republican Senator Bill Cassidy of Louisiana and Democratic Senator Tim Kaine of Virginia have brought forward a proposal to start a new investment fund that would require up-front funding of $1.5 trillion from the Treasury to get started. The funding will be invested in broad portfolio of stocks, bonds, and other assets over a 75 year period, the point by which the Treasury would be repaid.
Alternatively, the proposal to increase Social Security payroll taxes to 16,05% has also been brought forward, and whilst this percentage increase may seem minuscule, it will potentially add an additional $110,000 to the lifetime tax burden of an average worker over a 45 year career.
“Policymakers pledging not to touch Social Security are implicitly endorsing these deep benefit cuts for 62 million retirees in 2032 and beyond. It is time for policymakers to tell the truth about the program’s finances and to pursue trust fund solutions to head off insolvency and improve the program for current and future generations,” the Committee for a Responsible Federal Budget wrote in its report.