The Impending Shortage: What You Need to Know About Social Security’s Shortfall by 2035

Administered by the Social Security Administration, Social Security has become a cornerstone of retirement income for countless Americans. The federal Social Security and Medicare program, the core of the Social Security Act, provides retirement benefits and health insurance to retired and disabled workers, and extends these benefits to their families and survivors. It’s hardly shocking to American lawmakers: Social Security is confronting a major hurdle with the looming exhaustion of its trust fund projected in 2035. The depletion of the Social Security trust fund, resulting in the funds run dry scenario, as outlined in the Social Security trustees report, is a complex issue but we will attempt to shed light on the current status of the Social Security. For more details, read Will I Get Social Security If the Trust Fund Goes Bankrupt?

Surprisingly, the Social Security program cannot borrow money to fund its endeavor, raising concerns about being able to pay benefits beyond 2033. Under the direction of the Committee for a Responsible Federal Budget, to bridge the deficit or avoid a situation where funds run dry, social security taxes might need to increase, full benefits get curtailed, or apply both strategies simultaneously. The Social Security trustees, responsible for managing the Social Security Act, frequently debate on concepts of solvency, sustainability, and how the potential for funds to run dry will impact the budget. Currently, the Social Security Board of Trustees projects program cost to rise by 2035 so that taxes will be enough to pay for only 75% of scheduled benefits. According to the Social Security Trustees, this escalation in cost and potential for the ability to pay Social Security to be affected, results from demographic shifts, prominently the decrease in birth rates from 3 to 2 children per woman, rather than increased longevity. The Social Security trustees have cautioned that if the trust fund assets are depleted or funds run dry without any legislative modifications, the retirement benefits will inevitably be trimmed down without impacting budget deficits.

Brief History

The Social Security program, established by the Social Security Administration via the Social Security Act in 1935, serves as a reliable source of retirement benefits upon which American families can build additional protections against income loss due to retirement, disability, or the death of the primary earner. In 1940, 65-year-olds could expect to live 14 more years, but now, with the average lifespan extending well beyond 20 years, the social security works program is burdened by increased payouts. The number of Americans 65 and older will increase from about 58 million in 2022 to about 75 million by 2035. The Social Security Administration is facing considerable strain due to increased life expectancy and a surge in retirees availing Social Security payments. 

Current benefits paid:

• 49.4 million retired workers equivalent to $90.8 billion and an average monthly benefit of $1,837
• 7.5 million disabled workers equivalent to $11.2 billion and an average monthly benefit of $1,486
• 5.8 million survivors equivalent to $8.5 billion

Social Security is the major source of income for most people over age 65:

• Almost 9 out of 10 people age 65 and older were receiving a Social Security benefit as of June 30, 2023
• Social Security benefits represent about 30% of the income of people over age 65
• Among Social Security beneficiaries age 65 and older, 37% of men and 42% of womenreceive 50% or more of their income from Social Security
• Among Social Security beneficiaries age 65 and older, 12% of men and 15% of womenrely on Social Security for 90% or more of their income

Past Changes That Have Been Made 

The biggest Social Security adjustment made by Congress so far has been to increase the retirement age. In 1983 Congress approved legislation that would gradually change the retirement age from 65 to 67. If you want to explore the pros and cons of taking benefits earlier or later, check out What is the Best Age to Take Social Security?

In 1984, part of Social Security benefits became taxable for people who earn above a certain amount. If the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefit exceeds $25,000 for individuals and $32,000 for couples, up to 50% of your Social Security benefit is subject to income tax. If these sources of income top $34,000 for individuals and $44,000 for couples, 85% of your Social Security payments may be taxable.

The original Social Security contribution rate was 1% of pay, which was matched by employers. The tax rate grew to 1.5% in 1950 and gradually increased to top 5% by 1978. The current tax rate of 6.2% has been in effect since 1990.

The Social Security wage base indexed with inflation has helped to fund the system dating back to 1937.

How is Social Security Financed

It’s crucial to understand how Social Security is financed to grasp the looming issue of its trust fund depletion. The program is primarily funded through payroll taxes, with contributions from both employees and employers. These taxes are allocated to the Social Security Trust Fund, which serves as the financial reservoir for paying out scheduled benefits to retirees, disabled individuals, and beneficiaries’ survivors. Employees pay 6.2% and employers pay 6.2% for a combined 12.4% of worker’s income. This tax is paid until the Social Security wage base of $160,200 ($168,000 in 2024). 

Understanding the Social Security Trust Fund

The Social Security Trust Fund is a critical component of the program’s financial structure. It holds the reserves accumulated from the surplus of payroll taxes over the years. The trust fund ensures that Social Security benefits continue to be paid out, especially during economic downturns or when there are fewer workers contributing to the system.

2 Types of Trust Funds

The two Social Security trust funds are for Old-Age and Survivors Insurance (OASI) benefits and Disability Insurance (DI) benefits which are separate. In addition, there is the Hospital Insurance (HI) Trust Fund for the Medicare program. The benefits for Social Security and Disability may only be paid out of their respective funds. Each separate fund does not have the ability to borrow or pay the other’s benefits if a trust’s funds have been depleted. 

Insight into the Trust Fund Projection

The depletion of the Social Security Trust Fund would mean the program will no longer be able to pay its full scheduled benefits to recipients. This could lead to a reduction in monthly benefit amounts, affecting the financial well-being of retirees and other beneficiaries who heavily rely on these funds to meet their living expenses.

Benefits are expected to be payable in full until 2035. If no changes are made by 2035, current projections show that there will only be enough to pay 76% of scheduled benefits. Congress will need to enact major changes to either benefits, revenue sources, or both in the future. The Social Security Board of Trustees project that if no changes are made there would be an immediate reduction in benefits by about 13% or an immediate increase in payroll taxes between 12.4%-14.4%. This would allow for scheduled benefits to be paid in full for the next 75 years. 

Why is Social Security Running out of Money?

The financial challenges facing Social Security are primarily due to demographic and economic factors. Here are some key reasons why Social Security is facing financial strain:

• Aging Population: As the baby boomer generation (born between 1946 and 1964) retires, the number of retirees drawing benefits is increasing. The ratio of workers paying into the system to retirees receiving benefits is shifting, leading to a strain on the program’s finances.
• Increased Life Expectancy: People are living longer, which means they receive Social Security benefits for a more extended period. While this is a positive development in terms of increased life expectancy, it also puts a financial burden on the system.
• Decline in Birth Rates: There has been a decline in birth rates in many developed countries, including the United States. A smaller working-age population contributes less to the Social Security system, exacerbating the strain.
• Economic Factors: Economic downturns, such as recessions, can impact the overall revenue collected by the government, affecting the funds available for Social Security.
• Political and Policy Challenges: The structure of Social Security and decisions made by policymakers can also influence its financial health. Adjustments to the program, such as changes in tax rates, retirement ages, or benefit formulas, can impact the system’s sustainability.
• Low Interest Rates: The interest earned on the Social Security Trust Fund’s assets plays a role in funding benefits. In periods of low-interest rates, the returns on these assets are lower, affecting the overall financial health of the system.
• Inflation: Inflation can erode the purchasing power of Social Security benefits over time, leading to increased pressure on the system to provide adequate support for retirees.

What Measures Are Being Considered to Address the Impending Shortage?

In response to the potential depletion of the Social Security Trust Fund, several measures are being considered to address the impending shortage and ensure the long-term sustainability of the program. These proposed solutions aim to alleviate the financial strain on the trust fund and secure the availability of benefits for future retirees and beneficiaries.

One change that is helping to extend Social Security is the wage base tax which has increased from $147,000 in 2022 to $160,200 in 2023 and continues to rise indexed for inflation or an approval from Congress.

Addressing the Social Security funding shortfall is a complex issue that often involves a combination of policy changes. Here are some potential solutions that policymakers may consider:

• Increase Payroll Taxes
  • One straightforward approach is to increase the Social Security payroll tax rate. This could involve raising the current cap on earnings subject to the tax.
• Raise the Full Retirement Age
  • Gradually increase Social Security full retirement age could help offset the financial strain by adjusting for increased life expectancy and encouraging people to work for a more extended period before collecting benefits.
• Adjust Cost-of-Living Adjustments (COLA)
  • Modifying the way cost-of-living adjustments are calculated can help control the growth of benefits. Policymakers may consider using a different inflation measure or adjusting the formula for calculating COLA.
• Reduce Monthly Benefits
  • A benefit cut would reduce the monthly benefits received
•      Means-Testing Benefits
  • Implementing means-testing involves reducing benefits for higher-income retirees. This approach ensures that Social Security resources are directed more toward those with greater financial need.
• Taxing Social Security Benefits
  • Taxing a portion of Social Security benefits for higher-income retirees could generate additional revenue for the program.
• Investment Strategies
  • Exploring investment options for the Social Security Trust Fund could potentially increase returns. However, this approach comes with risks and would require careful consideration of investment policies.
• Education and Incentives
  • Implementing programs to encourage individuals to save more for retirement outside of Social Security can reduce reliance on the program. Financial literacy initiatives can also help people better understand the importance of personal retirement planning.
• Bipartisan Legislation
  • Social Security reform is a complex and politically sensitive issue. Bipartisan cooperation is essential to pass meaningful legislation that addresses the long-term financial sustainability of the program.
• Public Awareness
  • Educating the public about the challenges facing Social Security and the need for reform is crucial. This can build support for necessary changes and help manage expectations regarding future benefits.

It’s important to note that any changes to Social Security should be implemented carefully to minimize adverse effects on vulnerable populations and ensure a fair and sustainable system. Additionally, finding a balanced approach that considers various factors is essential for creating effective and lasting solutions. Social Security reform often requires careful consideration, public dialogue, and collaboration among policymakers.

Social Security is an Important Issue

Social Security is important for several reasons, and its significance extends to individuals, families, and society as a whole:

• Economic Security for Retirees
  • Social Security provides a crucial source of income for retirees, helping them maintain a basic standard of living after leaving the workforce. For many seniors, Social Security benefits make up a significant portion of their retirement income.
• Disability Protection
  • Social Security offers disability benefits to individuals who are unable to work due to a qualifying disability. This provides a safety net for those facing unexpected health challenges, ensuring they have some financial support.
• Survivor Benefits
  • Social Security provides survivor benefits to the spouses and dependent children of deceased workers. This helps families cope with the financial impact of losing a breadwinner.
• Reducing Poverty
  • Social Security plays a crucial role in reducing poverty among the elderly. Without Social Security benefits, a larger percentage of seniors would be at risk of falling below the poverty line.
• Universal Coverage
  • Social Security covers most American workers and is, therefore, a universal program that provides a baseline of financial support for retirees, disabled individuals, and survivors.
• Long-Term Care and Financial Stability
  • Social Security contributes to financial stability by providing a steady income stream during retirement. This can help individuals plan for long-term care needs and other expenses, reducing the burden on families and society.
• Inter-Generational Support
  • Social Security embodies a form of inter-generational support, with current workers contributing to the system to fund the benefits of current retirees. This system helps create a sense of societal responsibility and care for all members, regardless of age.
• Independence and Dignity
  • Social Security promotes independence and dignity among seniors by providing them with a financial foundation. This allows retirees to live with a degree of financial autonomy, covering basic needs without relying solely on family members or charitable assistance.
• Economic Stimulus
  • Social Security benefits provide a stable source of income for millions of Americans, contributing to overall economic stability. The spending of Social Security recipients helps stimulate the economy at the local and national levels.
• Preventing Elderly Homelessness
  • By providing a consistent income stream for retirees, Social Security helps prevent elderly homelessness and ensures that seniors can afford housing and other essential living expenses.

In summary, Social Security is a cornerstone of the U.S. social safety net, providing financial support to retirees, individuals with disabilities, and survivors. Its importance lies in promoting economic security, reducing poverty, and contributing to the overall well-being and dignity of individuals and families throughout the different stages of life.