If you are in your 40s or 50s and looking forward to retiring in a few years and drawing Social Security, there’s something you should know. Unless Congress acts to add to the Social Security trust fund, benefits will be slashed by 25% or more as early as 2035.
Estimates vary but at its current pace, the Social Security trust fund will run short of money at some point in the early 2030s. According to the Social Security Administration (SSA), the Social Security Board of Trustees projects program costs to rise by 2035 to the point that taxes will be enough to pay for only 75% of projected benefits.
If Congress doesn’t address the issue before then – which would almost certainly require some type of tax increase – benefits for everyone receiving Social Security would be cut, probably by at least 25%.
“This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman,” SSA explains on its website. “Importantly, this shortfall is basically stable after 2035; adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future.”
That’s reassuring for many people, but it depends on lawmakers in both parties coming to some kind of agreement. In this hyper-partisan atmosphere, how likely is that?
“My political calculus tells me that Congress has no choice but to enact the necessary provisions to increase the trust,” Terrell Finner, director of fundraising at Sole Strategies, a political action group, told ConsumerAffairs. “A reduction in Social Security benefits would burden our most vulnerable citizens and send the economy into a downward tailspin.”
In fact, there is evidence that some key members of Congress have quietly begun work on finding a solution. President Biden has also backed proposals to raise revenue by making more of taxpayers’ income subject to the FICA tax, which supports Social Security and Medicare.
Currently, the government stops taking out the FICA tax after a wage-earner has earned $162,000 in one year. Biden has proposed expanding that to $400,000. Treasury Secretary Janet Yellen has said she supports increasing revenue for Social Security but believes cuts in entitlements will also be part of the formula.
According to The Hill, Sen. Bill Cassidy (R-La.) and Angus King (I-Maine) are trying to craft a compromise that could win votes from both sides of the aisle in a narrowly-divided Congress. One of the proposals reportedly includes establishing an investment fund to contribute to the trust fund.
It’s been done before
As recently as 1982 Republicans and Democrats successfully worked together on a compromise to shore up the retirement fund. In 1983 President Reagan signed legislation that increased the Social Security and Medicare tax rate while also delaying when annual cost of living adjustments (COLA) kicked in.
So it’s possible that over the next decade, Congress can find a way to maintain Social Security in its present form. As a hedge, Finner suggests people approaching retirement maximize their savings.
“It could take months or years to come to an agreement on Capitol Hill,” Dinner said. “I would highly advise folks in their 50s should start taking precautions to position themselves to holdover in the face of a potential fallout over a limited benefit.”
Finner says socking away as little as 3% of their current income each year could guarantee financial safety “in the unlikely event of a cliff.”