Is Social Security Really Running Out of Money?
You’ve probably seen headlines warning that Social Security could be depleted by the year 2033. While that sounds alarming, it’s not entirely accurate.
Social Security has historically collected more in payroll taxes than it has paid out in benefits, allowing the trust fund to build a surplus. However, in 2021, the program has reached a turning point. It began paying out more in benefits than it collected in revenue. Since then, the surplus accumulated over the years has begun to decline.
If the trust fund reserves are depleted, Social Security won’t disappear. Workers and employers are still subject to pay payroll taxes, which are projected to cover roughly 75% of scheduled benefits. A 25% reduction in benefits would certainly be significant, but there are several ways policymakers could address the shortfall.
Think about your own budget. When expenses exceed income, you generally have two choices, you can increase income or reduce spending. Social Security faces the same basic challenge.
To increase program revenue, lawmakers could:
- Increase the payroll tax rate
- Raise the wage base so more income is subject to Social Security taxes
- Add additional taxes on higher-income households
- Expand which forms of compensation are subject to payroll taxes
To reduce program expenses, lawmakers could:
- Raise the full retirement age
- Reduce benefits for higher income earners
- Increase the number of working years used to calculate benefits
- Reduce annual cost-of-living adjustments
None of these options are easy, and each comes with tradeoffs. But that’s the important point: Social Security has a funding challenge, not an expiration date.
The question isn’t whether Social Security will exist in 2033. The real question is what changes will policymakers make to ensure the program remains sustainable?
For those planning for retirement, the best approach is to understand the potential changes and build a retirement strategy that doesn’t rely entirely on Social Security.
Call our office today to discuss how potential changes to Social Security could affect your retirement plan.