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Published: Aug 22, 2023 9 min read
Photo-illustration of layered blurred social security cards.
Money; Getty Images

A Social Security funding crisis could be on the horizon if policymakers fail to take action to protect the program in the next decade, threatening a 23% cut to all 70 million recipients' annual benefits, a new report claims.

The analysis by U.S. Budget Watch 2024, a project from the public policy organization Committee for a Responsible Federal Budget, predicts that if the primary trust fund used to bankroll Social Security runs out of reserves by 2033, the average newly retired dual-income couple would see an immediate reduction of $17,400. Single-income couples would lose $13,100.

The CRFB’s projections are based on an annual report released in March by the Social Security Board of Trustees, which predicted in January that the Old-Age and Survivors Insurance (OASI) Trust Fund will reach insolvency in the next 10 years without comprehensive revenue and benefits adjustments.

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By that time, today’s youngest retirees, who are 62 years old, will be 72, and today's 57-year-old workers will have reached the minimum retirement age.

Once the trust fund is depleted, by law, it can only spend as much as it receives in incoming revenue, resulting in cuts for all beneficiaries. The warning comes as candidates in the next presidential election face partisan pressure to promise not to touch Social Security, a move that the CRFB says would spell disaster.

“Any 2024 presidential candidate who pledges not to touch Social Security is implicitly endorsing a 23 percent across-the-board benefit cut for the 70 million retirees when the Social Security retirement trust fund reaches insolvency in just a decade,” the CRFB says in the report.

How is Social Security financed?

The Social Security Administration mostly supports retired workers, but it also provides monthly benefits through the smaller Supplemental Security Income (SSI) program for people with limited income and resources who are blind, 65 or older, or who have a qualifying disability.

These programs are paid out through two separate trust funds, but the CRFB report is focused on the one for retirement benefits, or the OASI trust fund.

Benefits for retired workers are largely funded by payroll taxes that are deposited into the OASI trust fund, which automatically distributes monthly payments to beneficiaries, their families and some survivors of deceased workers. The average monthly Social Security payment comes out to about $1,704, according to the SSA, which translates to roughly $20,448 a year.

The administration calculates benefits using date of birth and “average indexed monthly earnings,” or the average of up to 35 years of a worker’s indexed earnings. In other words, your retirement benefits are determined by how much you’ve paid into the system based on up to 35 of your highest-earning years working, as well as the age at which you claim.

You can claim your benefits as early as age 62, but if you hold off until the full retirement age of 67 up to age 70, your benefits increase.

Will Social Security really run out?

With so much research highlighting Social Security’s shrinking reliability as a source of retirement income, many Americans are anxious that it won’t provide an adequate safety net — or be around at all — when they retire.

Mary Johnson, Social Security and Medicare policy analyst for advocacy group The Senior Citizens League, tells Money that if history is any indication, the CRFB’s prediction of a universal 23% cut by 2033 is a real possibility.

Even though Congress has a decade to approve Social Security reforms, the last time that happened was 1983. Legislators only reached an agreement by the skin of their teeth. The OASI trust fund was within weeks of insolvency when the 98th Congress passed an $168 billion package that, in part, decided that up to 50% of Social Security benefits could be tacked onto taxable income for higher-earning taxpayers.

In the years since, Johnson says that many groups have tried and failed to negotiate changes to ensure the long-term viability of Social Security.

“It is very, very hard to enact comprehensive Social Security reform,” she says, noting that the 1983 package “almost did not pass.”

The trustees project program costs to rise by 2035 due the aging population and falling U.S. birthrates, among other factors, which would mean the current Social Security payroll tax would not cover recipients' full benefits.

Johnson, who has studied Social Security for the past two decades, says insolvency could cause a dramatic increase in poverty among older adults. Smaller checks would mean beneficiaries, especially those who receive most or all of their income from Social Security, may not be able to pay for basics like food, shelter and health care.

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What happens next?

To be clear: Lawmakers may seem far from an agreement on how to fix Social Security, but they still have a lot of time before insolvency is imminent. Present and future Social Security beneficiaries can also find some reassurance in the fact that these payments have never been cut, suspended or delayed due to a failure by Congress to pass legislation in time.

Even if the OASI does become insolvent, that’s not the same as the program going bankrupt. So while beneficiaries would hypothetically see a significant benefits cut if the OASI were to deplete its coffers, they’d still be getting most of the funds they’re entitled to — about 77%.

What does Congress need to do in order to keep the OASI from going insolvent? The answer depends on who you ask.

In January, the trustees outlined potential reforms to bring the program to sustainable solvency and ensure benefits can be paid in full for the next 75 years.

Some lawmakers have proposed raising the full retirement age to 70, which means current workers would lose two to three years of benefits.

Other solutions include raising the payroll tax rate to almost 16% or raising the wage cap on Social Security taxes, which is currently set at $160,000 a year. Democratic lawmakers reintroduced a bill in February that would impose payroll tax on earnings over $250,000, an adjustment that an estimate from the Congressional Budget Office says could delay the insolvency date to 2046. The bill is currently in committee.

Should I prepare for Social Security insolvency?

No one can predict the future, but it’s always best to be ready for it — and in this case, that means building up your retirement and emergency funds as much as possible.

Social Security was never intended to be a sole source of income for retirees; instead, it was set to be part of what financial experts call the “three-legged stool.” The other two legs in this traditional retirement plan are personal savings and employer pensions (although pensions have become rarities for younger generations of workers thanks to a trend of private companies eliminating their programs).

Macroeconomic factors like inflation, wage inequality and lack of access to employer-sponsored retirement benefits are making saving enough for retirement difficult for Americans across age groups and income levels. Even with full Social Security benefits, recent research from The Senior Citizens League found that monthly payments haven’t kept up with inflation, especially for the oldest retirees.

If your employer offers a 401(k), take advantage of it and put as much toward it as your budget allows, making sure to contribute at least enough to unlock your employer match. Traditional and Roth IRAs are other options if you don’t have access to employer-sponsored retirement plan.

Your goals should align with your age and how much you expect you'll need each month in retirement — the SSA has a free calculator that can help you figure out the right budget.

No matter where you are in the planning process, it's crucial to budget wisely now. Having good grasp on your current expenses, where you can reduce spending and how much you can afford to save can make all the difference when you enter retirement.

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