Social Security is facing a funding crisis that could lead to significant benefit cuts for retirees in the near future. The Social Security Board of Trustees estimates that the Old Age and Survivors Insurance trust fund will be depleted by 2033. If Congress doesn’t act to change Social Security and improve its longevity, retirees could see a 23% reduction in benefits starting that year.
The trust fund was established to hold excess tax revenue from wages to pay out to retirees when they start collecting benefits. However, as Baby Boomers started retiring, life expectancies increased, and younger generations had fewer children, demographic shifts began putting pressure on the trust fund balance. Social Security has been running a deficit in most years since 2018, and that deficit is worsening each year.
Growing income inequality in America is also negatively impacting Social Security. Only 82% of earnings were subject to Social Security tax in 2022, compared to the 90% benchmark Congress targeted in its 1983 reforms.
Social Security trust fund concerns
A slow-growing working population, exacerbated by a decline in immigration, is another challenge. Recent legislation that repealed the Windfall Elimination Provision and Government Pension Offset, boosting Social Security benefits for 3.2 million retirees, has further depleted the trust fund. This change, along with the other factors, led the trustees to increase their forecast of the Social Security shortfall in the latest report.
Despite the grim outlook, it’s still in most seniors’ best interest to wait to claim Social Security on their own terms. It’s doubtful Congress will allow significant benefit cuts, and taking Social Security early could result in a much worse scenario in the future. Alternative solutions are being discussed, including raising the payroll tax cap, slightly increasing the payroll tax itself, encouraging legal immigration, and increasing the contribution rate for the wealthiest Americans.
However, without sensible intervention from policymakers, the next president and Congress will inherit a substantial mess. Social Security serves as a critical financial lifeline for millions of Americans, lifting 22 million people above the federal poverty line in 2023. Maintaining the program’s economic health is crucial not only for current retirees but also for future generations who will rely on this essential program.
