Unless lawmakers come up with a plan to deal with Social Security’s looming funding shortfall, retirees will likely see a reduction in benefits in about a decade. That reduction could be especially painful for Americans born after 1970, according to projections from the Congressional Budget Office.
The shortfall will arrive when Social Security’s Old Age and Survivors Insurance (OASI) Trust Fund runs out of money. The CBO expects that to happen in fiscal year 2033. When the OASI fund is depleted, Social Security will have to be funded solely through revenues from payroll taxes — and those revenues only cover about three quarters of current benefits.
The CBO projects that beginning in fiscal year 2034, Social Security benefits would shrink by 25% vs. current levels. By 2097, benefits would be 30% smaller than they are now.
The reductions won’t be felt the same by everyone, however. Older retirees will feel much less impact than younger ones when the shortfall kicks in.
For example, the CBO expects that the impact of benefit cuts will initially be felt by people born after 1968, or those who turn 65 in 2033. As the FEDweek government news site noted, there would be “no effect on the starting benefits of anyone born in the 1950s,” and only a 2% impact for those born in the 1960s.
But for those born in the 1970s, there would be a 25% reduction in initial benefits, according to FEDweek’s analysis of the CBO data. For people born in the 1980s, the initial impact would be 26%, and for those born in the 1990s it would be 28%.
Older retirees will feel an impact as time wears on, however. The CBO estimates that those born in the 1950s would see a 9% reduction collectively over their lifetimes, FEDweek noted. For those born in the 1960s, the impact would be 19%. The impact rises to 25% for those born in the 1970s and 27% for those born in the 1980s and 1990s.
If you want to know what all this means in terms of actual dollars, an Aug. 8 report by the nonprofit Committee for a Responsible Federal Budget (CRFB) puts things in stark detail. In that report, the CRFB wrote that when the OASI fund becomes insolvent, annual benefits “would be cut by $17,400 for a typical newly retired dual-income couple.” Its estimate is based on a 23% cut in benefits rather than a 25% cut.
For a typical single-income couple, the CRFB estimates that the immediate cut would be $13,000 a year. Cuts would differ depending on income. For example, the CRFB projects that a low-income, dual-income couple retiring in 2033 would see a $10,600 yearly cut, while a high-income, dual-income couple retiring in 2033 would see a $23,000 cut.
None of this is necessarily set in stone, by the way. One way to address the problem and lessen the financial blow to Social Security beneficiaries is to inject more revenue into the program. This could come in the form of raising the income threshold on wages subject to Social Security payroll taxes.
Currently, workers contribute 6.2% of their wages to Social Security taxes and employers match that contribution. Any earnings above $160,200 a year are exempt from the tax. As GOBankingRates previously reported, raising the income cap to $250,000 or more — or even eliminating it altogether — could replenish the trust fund reserves and keep the program running at full capacity beyond the next decade.
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