The future of Social Security remains uncertain. In fact, the Social Security trust funds that pay retirement and disability benefits could possibly be depleted by 2035.
Last year, on the Social Security Administration's blog, the then-acting commissioner of Social Security wrote, "[As] a whole, Social Security is fully funded until 2034, and after that it is about three-quarters financed ... the DI (Disability Insurance) fund will now be able to pay full benefits until 2023, and the retirement fund alone will be adequate into 2035."
Part of the problem can be attributed to longer life expectancies, a smaller working-age population and an increase in the number of retirees. By 2035, the number of Americans 65 and older will increase from about 48 million today to more than 79 million. As a result, more people will be taking money out of the system — but there will be fewer people paying into Social Security.
That doesn't mean the program will run out of money entirely, though. Payroll taxes are expected to cover about 75 percent of scheduled benefits. But if the gap isn't filled, retirees could get less Social Security or workers might need to pay more into the system. If no changes are made, this is what Social Security could look like in the future, according to the experts.
Worst-Case Scenario: Benefits Would Be Cut
If you plan to rely on the program in 2035, keep in mind there's a chance you could receive less in Social Security. If no changes are made to deal with the trust fund shortfall, benefits will have to be reduced by 21 percent, according to the 2016 annual report of the trust fund Board of Trustees.
For many retired adults, that could be a big hit. Social Security is the dominant source of income for nearly half of elderly married couples and 71 percent of single elderly beneficiaries, according to the Social Security Administration.
"The ramifications of that event would be beyond traumatic for everyone in the country," said Joseph E. Roseman, Jr., a Social Security expert and managing partner of wealth management firm O'Dell, Winkfield, Roseman and Shipp. "You've got a national disaster on your hands."
That's why he thinks Congress will step in before 2035 to prevent such a deep cut in benefits. "Dear God, in 18 years, can't someone figure out a way to fix it?" he said.
Mary Beth Franklin, a Social Security expert and contributing editor for Investment News, agrees that a 21 percent cut in benefits is unlikely.
"As pensions are disappearing, people are relying more on Social Security," she said. Because of the program's popularity, politicians won't want to tinker with benefits for existing retirees and will likely have to find other solutions to the trust fund shortfall.
The Social Security Payroll Tax Rate Could Rise
If benefits aren't cut, tax revenue for the program will likely have to increase. One way to do that is to increase the payroll tax rate. Social Security is funded through a 6.2 percent payroll tax that workers pay and another 6.2 percent that employers pay (self-employed people have to pay the full 12.4 percent).
If the trust fund reserves become depleted, the payroll tax would need to increase by 3.58 percentage points to increase revenues enough to sustain the program, according to the 2016 annual report of the Board of Trustees. Legislation recently introduced by Rep. John B. Larson aims to keep the trust fund solvent by gradually phasing in "an increase in the contribution rate beginning in 2019 so that by 2042, workers and employers would pay 7.4 percent instead of 6.2 percent today."
However, Roseman doesn't expect Congress to raise the payroll tax to boost trust fund reserves. "There's probably the least appetite for that than anything you can look at," he said. "It's a tax increase."
Learn More: How to Calculate Your Social Security Tax Rate
More Wages Could Be Taxed
Another option to increase tax revenue to fund Social Security is to raise the amount of earnings subject to taxation.
This year, Americans are already seeing a bigger percentage of their earnings taxed as a result of changes to Social Security. The amount of earnings subject to the payroll tax for Social Security increased from $118,500 to $127,200.
To help the trust fund remain solvent, the taxable wage limit would have to be even higher or lifted entirely so that all income would be subject to the payroll tax, said Franklin. This change would affect high-income people whose earnings above $127,200 currently escape taxation for Social Security.
The S.O.S. Act of 2016 proposed raising the amount of income subject to the payroll tax to $308,750 by 2021. If that change were enacted, people earning $308,750 or more would see their tax bill increase by about $10,000, Roseman said.
The Full-Retirement Age Could Rise
Because tax hikes aren't popular, Congress will more likely raise the full retirement age for Social Security benefits, Roseman said. That means younger generations will have to work longer before they can start collecting benefits.
Currently, the age at which you can collect full retirement benefits ranges from 65 if you were born in 1937 or earlier up to 67 if you were born in 1960 or later. Both Roseman and Franklin said there are proposals to raise the full retirement age gradually to 69.
Now, if you delay collecting retirement benefits past your full retirement age, your benefit increases each year you wait until age 70, Roseman said. If the retirement age was raised, that would keep more money in the trust funds. But, it means the possible elimination of a popular strategy that retirees use to maximize Social Security income.
The Social Security COLA Could Be Reduced
Retirees receiving Social Security benefits typically see their checks increase slightly most years to keep pace with inflation. These cost-of-living adjustments — or COLAs — are based on the Consumer Price Index.
To keep the Social Security trust funds solvent, there could be changes to cost-of-living adjustments, Roseman said. Most likely, the formula wouldn't change for people born before 1960. But people born after 1960 could see a reduced COLA, he said.
If that happens, benefit checks will not increase as much as inflation does. People who rely heavily on Social Security might have to find ways to reduce spending to make ends meet.
As Roseman sees it, the Social Security shortfall problem is easy to solve, but it's not easy to get Congress to make the necessary changes. "Nobody wants to compromise," he said
Nonetheless, he said Social Security will not run out of money and tells his clients to count on it as a source of retirement. But it shouldn't be your only source of retirement income. "I would never advise anybody to live on Social Security alone," he said.