A major funding source for Social Security is now expected to run out of money a year earlier than previously projected, putting even more pressure on lawmakers to come up with a solution for a program that could see close to one-quarter of its funding depleted next decade.
In its annual Trustees’ report, released on March 31, the Social Security Administration said that under current assumptions, the program’s Old Age and Survivors Insurance (OASI) Trust Fund will become depleted in 2033. That’s one year earlier than projected in last year’s report. When the fund runs dry, Social Security benefits would have to be funded solely through payroll taxes, which cover only about 77% of current benefits.
The combined OASI/Disability Insurance fund, which pays for both Social Security and Medicare, is expected to become depleted in 2034, which is also one year earlier than projected in last year’s report.
“The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them,” the SSA report stated. “Implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits.”
As previously reported by GOBankingRates, the OASI fund represents a budget surplus that built up while baby boomers were working and contributing to Social Security through payroll taxes. With many boomers now retired and collecting Social Security, the fund is fast running out of money.
The latest Trustees’ report follows recent estimates from the Congressional Budget Office that the OASI fund could run out of money as early as 2032. No matter when it runs out, future Social Security recipients could face lower monthly payments unless Congress figures out a way to close the funding gap.
Many Social Security advocates support legislation that would increase revenues through higher payroll taxes. Currently, employees and employers each pay 6.2% of wages on Social Security, with self-employed individuals paying the full 12.4%. Raising those rates is one way to increase revenues.
Another option is to raise the income threshold on wages subject to Social Security. In 2023, any yearly earnings above $160,200 are not subject to Social Security taxes. Raising that threshold to $250,000 or higher would bring in more money — something lawmakers like U.S. Sens. Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.) support, along with advocacy groups such as the National Committee to Preserve Social Security and Medicare (NCPSSM).
“Congress can strengthen the program’s finances by bringing more revenue into Social Security,” the NCPSSM said in a March 31 press release. “We support legislation introduced by Senator Bernie Sanders to keep the trust fund solvent for the rest of this century while expanding benefits. We also support Rep. John Larson’s [(D-Conn.)] Social Security 2100 Act, which the congressman plans to re-introduce this Spring. Both bills would adjust the Social Security payroll wage cap so that higher-income earners begin contributing their fair share.”
The AARP also calls on Congress to come up with a way to deal with the looming Social Security funding shortfall.
“It will take hard work to find bipartisan agreement, but today’s report shows how essential it is that leaders in Washington come together for the good of the country,” AARP CEO Jo Ann Jenkins said in a statement last week. “Congress must take its responsibility to protect Social Security and Medicare seriously, by developing a comprehensive plan and doing so in a way that is accountable and fully transparent to the American public.”
The key word there is “bipartisan.” While many Democrats support increasing revenue through higher taxes, some Republicans have proposed raising the full retirement age as high as 70 years old from the current 66/67 years old. Others have suggested either partially privatizing Social Security or sunsetting the program so it can be reviewed every five years.
The good news is, Social Security will still be about 75% to 80% funded via payroll taxes even after the trust fund runs out. Financial experts warn retirees against applying for Social Security benefits early out of fear that the program is running out of money. For most Americans, waiting as long as possible to collect Social Security is the best option because you can ensure higher monthly payments.
“Don’t elect benefits out of fear,” Joe Elsasser, a certified financial planner and president of Social Security claiming software company Covisum, told CNBC.
Meanwhile, others urge Americans to take an active role in convincing lawmakers to protect Social Security.
“The best thing for younger adults to do is to rally behind Social Security now and disregard rhetoric that the program must be cut and privatized or that it won’t be around in 40 years — otherwise it will become a self-fulfilling prophecy,” an NCPSSM spokesperson told GOBankingRates in an email. “Fortunately, majorities of the American public across party lines support strengthening and expanding Social Security, and oppose conservative solutions such as raising the retirement age.”
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