Social Security Funding

If you’re newly retired or close to retirement, one of the things that may be top of mind is Social Security. You’re probably trying to decide when to claim Social Security. Also, you may have heard “Social Security is running out of money” and wondering whether Social Security will be there for you.

Social Security comprises at least 50% of their income for around half of retirees. So the solvency of Social Security is of great interest and importance to many people. The Social Security Board of Trustees’ annual report gives insight into Social Security’s financial status and can help people decide on the best strategy for their situation.

Social Security Report Projects a Funding Shortfall

On March 31, 2023, the Social Security Board of Trustees published its annual report on the financial status of Social Security and long-term funding projections for the two major Social Security programs. Each year, the board submits its report to Congress that describes the programs’ finances and the board’s recommendations.

As in previous years, this year’s report projects significant financial shortfalls for the Old Age and Survivors Insurance (OASI) Trust Fund, the fund that pays benefits to retirees and their spouses. The fund will be able to pay out 100% of scheduled benefits until 2033; after that, the fund will only be able to pay out 77% of expected benefits.

Starting this year, the OASI Trust Fund will begin to pay out more than it takes in. This overdraft will start to draw down the trust fund reserve, which is currently $2.7 trillion. By 2033, the reserve will be depleted; after that, the fund will only be able to pay out in retirement benefits each year what it takes in from current workers. And with just 2.1 workers per retiree, there are not enough workers to support full benefit payouts, so the fund will have to cut its benefit payouts by about 25%.

The other major Social Security fund, the Disability Insurance Trust Fund, is in better financial shape. It will be able to pay 100% of scheduled benefits through at least 2097, according to the board’s projections.

This year’s report projects the OASI fund reserve will be exhausted a year earlier than last year’s report. The board says this change is due to worsening economic conditions, lower GDP, and higher inflation, all of which negatively impact the OASI fund. Worsening economic conditions and lower GDP result in lower wage growth and higher unemployment, which reduce the amount Social Security takes in. Higher inflation requires higher cost-of-living benefit increases, which raise the amount Social Security pays out.

Can Social Security Benefits Really Be Cut?

A significant cut in Social Security benefits would have a devastating impact on many retirees and the country. About 20% of people aged 65 and over rely on Social Security as their sole source of income. According to the Census Bureau, the poverty rate for Americans aged 65 and over increased from 9.3% in 2016 to 9.6% in 2021. A 25% cut in Social Security benefits would push millions of seniors into poverty. Furthermore, a decrease in Social Security payments by just 5% would decrease the nation’s economic output by $63 billion, cost 419,000 jobs, and lower tax revenues by $7.8 billion, according to a Center for Rural Strategies study.

As before, the trustees board offered many suggestions to reduce the Social Security funding shortfall. A few of these are:

  • Increasing the full retirement age by one month each year until it’s 68
  • Increasing the FRA by two months each year until it’s 69, then increasing by one month every two years
  • Reducing the annual cost of living adjustment by 0.5%
  • Reducing benefits for higher-income retirees starting in 2030
  • Raise or eliminate the benefit base, which is the maximum amount of annual income subject to Social Security payroll taxes (currently $160,200)
  • Increase Social Security payroll tax from 12.4% to 16%

Each action the report proposes would eliminate all or part of the shortfall. But each would face varying amounts of political opposition.

While no one knows what will happen with Social Security in the next 10 years, most believe Congress will eventually do something to avoid reducing benefits. The most likely changes include raising the benefit base and gradually increasing the FRA.

Anyone 56 or younger will not reach full retirement age before the trust fund is projected to run out of money. Although significant benefit cuts are considered unlikely, raising the FRA and increasing the benefit base and payroll taxes are stronger possibilities. 

If you plan to delay taking Social Security until FRA to maximize your benefit, you will want to consider this. If you plan to continue working and delay taking Social Security, you’ll want to consider how a higher benefit base or payroll taxes would affect your financial planning.

Since taking Social Security earlier than FRA reduces your benefit by about 8% per year, an option is to delay for a few years to offset possible benefit decreases in the future.

We hope you found this post, Social Security Funding and How It Might Affect You helpful. Be sure to check out our post, 5 Best States to Move to for retirement for more great information.

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