The Old Age and Survivors Insurance (OASI) trust fund reserves that cover Social Security benefits — in part, for roughly 57 million Americans — is currently on track to be depleted by 2033, GOBankingRates previously reported. The balance of benefits, 77%, comes from payroll taxes.
To shift course, the Social Security Administration (SSA) has a few options: cut Social Security benefits or increase taxes. Without any action, Social Security recipients could see an automatic cut of 20% in their benefits in 2034, according to a brief from the American Academy of Actuaries.
“Acting now to address Social Security’s financial challenges would allow Congress to consider reform options that are more moderate, gradual, and give the American people time to adjust to any needed changes in benefits or taxes,” stated Academy senior pension fellow Linda K. Stone, via the American Society of Pension Professionals and Actuaries website.
But should the action involve reducing benefits or increasing taxes?
Benefits Cuts May Not Be the Answer
First, it’s important to realize that the government has never cut benefits already being paid, according to Actuary.org’s brief. “If Congress is unable to act before 2034, a reduction in benefits to people not in pay status at that point would have no impact on 2034’s cashflow,” the brief indicated.
Even if benefits are cut through a variety of techniques starting within the next year, it would only reduce the shortfall by about 28%, the paper outlined.
This means tax hikes are seemingly inevitable, with or without benefits cuts.
“If Congress cannot reform Social Security until 2034, all of the reform would need to be through increased taxes (unless Congress is willing to break its tradition of not cutting benefits already being paid or is willing to borrow from general revenue),” according to the brief.
How Much Would Taxes Need to Increase?
Without benefit cuts, the SSA would need to increase taxes by 25%. Increasing the payroll tax to 7.75% (up from its current 6.2%) for workers and employers would eliminate the shortfall, according to the brief.
But Social Security taxes have never been increased by more than 0.5% in any year. “It would be less disruptive to employers and workers if increases in the tax rate were gradually phased in,” the brief pointed out. “But that approach would need to be enacted soon in order to pay all benefits in 2034.”
The SSA has other options to increase revenue by collecting more taxes as well, as outlined in the brief.
- Tax all earnings, eliminating the tax cap (which is $160,200 in 2023).
- Increase taxable maximum to $400,000.
- Tax investment income, estates, gifts, and carried interest.
On their own, none of these three solutions would cover the entire shortfall, so a combination of measures must be considered.
Quick Actions Can Reduce the Negative Impact
Experts indicated that a combination of phased-in benefits reductions and tax cuts could help solve the shortfall. “A solution to Social Security’s solvency is needed sooner rather than later,” the report emphasized.
But time is of the essence. Regardless of the changes, whether they come in the form of tax hikes or benefits cuts, they must be implemented soon to keep Social Security benefits intact.
Small actions today, such as phasing in both tax increases and benefits reductions, would be less disruptive to employers, the workforce and Social Security beneficiaries. Phasing in changes, the report pointed out, also gives people more time to plan for retirement. By spreading out changes over the next decade, each individual would face less of an impact and would have the opportunity to alter their budget accordingly.
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