The Social Security system, a cornerstone of financial security for millions of Americans, is facing a significant funding shortfall. The program could see substantial cuts if Congress doesn't take action soon. This potential crisis has far-reaching implications for current and future beneficiaries. Here's a closer look at what's happening and what it means for you.

The Funding Shortfall Explained

Social Security's funding issues stem from a combination of factors, including demographic shifts, economic changes, and legislative decisions. As the population ages and birth rates decline, fewer workers are paying into the system while more people are drawing benefits. This imbalance is exacerbated by increasing life expectancies, which means that people are receiving benefits for longer periods.

The Social Security Old Age and Survivors Insurance (OASI) Trust Fund, which helps cover the gap between incoming payroll taxes and outgoing benefits, is projected to be depleted by 2033. While the Disability Insurance (DI) Trust Fund is expected to be depleted by 2098. Since there are 2 separate trust funds, it would take an act of congress to merge the funds. Combining the two funds would only add 2 years of solvency, from 2033 to 2035. Without intervention, this could result in across-the-board benefit cuts of 21%.

The OASI Trust Fund

Additionally, according to current laws, the SSA cannot contribute to the national deficit or increase debt. When the SSA needs to pay out more in benefits than it receives in Social Security taxes, it will use the surplus funds found in the OASI Trust Fund. This surplus is invested in special-issue Treasury bonds, which the SSA will redeem as needed to cover benefit payments.

However, the challenge arises in how Congress will manage the repayment of these Treasury bonds, especially given the substantial national debt. The repayment of these bonds will require the federal government to find the necessary funds, which could involve borrowing, raising taxes, or cutting other spending.

The sustainability of the OASI Trust Fund and the broader Social Security system is a significant issue that will require careful planning and potential legislative changes in the coming years.

Potential Impact on Beneficiaries

If Social Security benefits are reduced, the impact will be felt by millions of Americans, particularly retirees, disabled individuals, survivors, and low-income seniors who rely heavily on these payments for their daily living and medical expenses.

Calls for Legislative Action

Lawmakers are aware of the looming crisis and there have been calls for urgent action to address the funding shortfall. Possible solutions include:

• Raising the Payroll Tax Cap: President Biden suggests raising taxes on wealthy Americans to ensure the program's solvency. Specifically, he has proposed subjecting earnings over $400,000 to Social Security payroll taxes, which are currently capped at $168,600 in 2024. This measure is designed to increase the revenue flowing into the Social Security trust fund. Biden's 2020 campaign pledge to raise taxes on the wealthy has yet to come to fruition. It is likely that this has not happened because the income cap exists to limit monthly benefits to those high wage earners. A tax increase would raise the maximum benefits to those individuals—which potentially means spending any additional revenue gained. Additionally, increasing taxes on the wealthy without increasing the maximum benefit is only expected to postpone the OASI Trust Fund insolvency for an additional 5 years.

• Adjusting Benefits: Changing the formula for calculating benefits, such as adjusting cost-of-living increases, could help reduce expenditures. However, with rising inflation this equates to decreased benefits.

• Increasing Retirement Age: Gradually raising the full retirement age could reduce the amount paid out in benefits, though this approach is controversial and may not be feasible for all workers. Raising the retirement age may increase Social Security Disability (SSD) applications due to medical conditions that are attributed to age. An increase in SSD applications would deplete the DI Trust sooner, increase SSA’s operational budget, and increase SSD application wait times.

• Diversifying Investments: Allowing the Trust Fund to invest in a broader range of assets could potentially yield higher returns. However, this solution introduces more risk. This is probably the worst idea of all.

  “By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are "special issues" of the United States Treasury. Such securities are available only to the trust funds.” Source

• Economic Growth: Former President Trump's strategy for bolstering Social Security hinges on the belief that a stronger economy will naturally generate the necessary funds to sustain the program. His approach centers on fostering economic growth and job creation, which he argues will increase payroll tax revenues, thereby supporting Social Security. By cutting taxes and regulations, Trump aims to stimulate economic activity and employment, which in turn would enhance the financial health of Social Security. However, critics argue that this approach relies heavily on optimistic economic assumptions and does not directly address the immediate funding gap.

What You Can Do

While much of the responsibility for solving this issue lies with policymakers, there are steps individuals can take to prepare for potential changes:

• Start a Side Hustle: A side hustle can provide additional income, financial security, and peace of mind in light of these potential changes. When selecting a side hustle, consider your skills, interests, and the time you can realistically commit.

• Stay Informed: Keep up to date with legislative developments regarding Social Security. Understanding proposed changes can help you make informed decisions about your financial future.

• Advocate for Change: Contact your senators and representatives to express your concerns and advocate for policies that will strengthen Social Security for future generations.

Conclusion

The potential Social Security funding shortfall is a pressing issue that requires immediate attention from Congress and proactive planning from individuals. By understanding the challenges and taking steps to prepare, you can better navigate the uncertainties ahead. Stay informed, stay engaged, and take control of your financial future.

Photo by Ante Hamersmit