For most pre-retirees, planning for retirement includes deciding when to begin receiving a monthly benefit from Social Security. However, lately there has been a lot of news questioning the ability of the Social Security Administration to pay out these benefits in the future. And if benefits are paid, will the benefit be reduced from the monthly amount estimated on the Social Security Statement? A reduction in estimated benefits could have a significant effect on a person’s retirement plan. So how likely is it the benefits will be reduced? Is there a way to “fix” Social Security? And can it be done in time?
How Social Security Benefits are Funded
Social Security benefits are paid from the Old-Age and Survivors Insurance (OASI) Trust Fund reserves, income taxes collected on Social Security benefits, and through FICA taxes paid by employees, employers, and self-employed workers. The Social Security Administration can only use these sources to pay out Social Security benefits to the 59.3 million people currently receiving benefits. (Monthly Stat Snapshot April 2024)
Unfortunately, benefits currently being paid out exceed the tax revenue for Social Security – more people are receiving benefits than paying into the system. This means the Social Security Administration has been using the OASI Trust Fund to pay for the Social Security benefits in excess of the tax revenue.
How Much is Left in the Trust Fund and When Will it Run Out?
According to the 2024 Social Security Trustees Report, the OASI Trust Fund can pay 100% of scheduled retirement and survivor benefits until the year 2033, the same as last year’s report. In 2033, the OASI Trust Fund is projected to be depleted. Once the fund is depleted, the only source of Social Security funding would be FICA taxes and income taxes on Social Security benefits. These sources are expected to be able to produce about 80% of the scheduled benefits. (Trustees Report for 2024)
Many seniors rely heavily on Social Security to fund their living expenses. The idea of the government reducing Social Security benefits for existing recipients seems very unlikely as older Americans have considerable voting power. A more likely scenario is something similar to what happened in the early 1980s.
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We’ve Been Here Before
The 1979 Social Security Trustees Report predicted the program would be solvent through 2032. However, recessions in 1980 and 1981 worsened the program’s finances and by 1982, the trustees projected the fund would be insolvent by July 1983, just months away.
Luckily, Congress was able to quickly pass legislation that made several changes to Social Security including increasing the Full Retirement Age from 65 to 67 over time and charging income taxes on Social Security benefits. While charging income taxes on these benefits helped stabilize the system, those in higher tax brackets ultimately received a reduced benefit amount because of the additional taxes.
Once again to stabilize Social Security before 2033, Congress will need to make changes to the Social Security program by passing legislation. Something they were able to do in record time in the early 1980s.
What are the Options to Fix Social Security?
There is much discussion about how to “fix” Social Security and many ideas have been suggested. Two likely options are raising the income cap and increasing the FICA tax rate from 6.2% to 7.2%.
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As of 2024, FICA taxes only apply up to $168,600 of an individual’s annual income. That means FICA taxes are not collected on incomes greater than $168,600 per year. Raising the income cap above this level would help strengthen the program. As would increasing the FICA tax rate from 6.2% to 7.2% over time. Congress could also implement a combination of these options along with other ideas such as raising the Full Retirement Age again or reducing the cost-of-living adjustments.
Will Social Security Benefits be There for Me When I Retire?
The short answer is yes. The Old-Age and Survivors Insurance (OASI) Trust Fund continues to receive money from FICA taxes, and that will continue. The more relevant question is how much benefit can I expect, and at what age will I be entitled to start benefits? The answers to these questions are much murkier, especially for the younger generations.
If you are in your sixties, you can count on benefits to be somewhat similar to what you are expecting to receive. For younger workers, the benefits actually received may be somewhat less than what people are now receiving, and FICA taxes on their wages may be higher than what current workers are paying, especially for those making more than $168,000 of income.
Social Security isn’t going away and in its nearly 90-year history has never missed a payment. The imbalance between taxes collected on current workers and benefits paid to current beneficiaries is unstainable. However, if the Trust Fund runs out of money, it does not mean that benefits will stop. If no action is taken by Congress to ensure the solvency of the Trust Funds, the Social Security program will still have enough FICA taxes coming in to pay most of the scheduled benefits. Congress has previously acted to ensure the solvency of the Trust Funds and protect Social Security benefits.
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