The Social Security Funding Crisis – What Does it Mean for You?

Recipients of Social Security income recently received an 8.7% cost-of-living increase, the highest increase since 1981. While such an increase was necessary to help seniors keep up with rising prices, the increase, as well as rising interest rates, is contributing to the challenge of keeping Social Security solvent. On April 26th, the Social Security Trustees and the Congressional Budget Office projected that the retirement Trust Fund would be exhausted in ten years. According to the Congressional Research Service, once asset reserves are depleted, the program can only pay out what it brings in from income tax revenues. By 2034, tax revenues will be sufficient to pay only 80% of scheduled benefits. Whether you are a member of Gen Z or already receiving Social Security, you may be wondering what all of this means for you. You may also be wondering what can be done to solve the problem.

Social Security is funded through a payroll tax whereby employers and employees each pay 6.2% of their wages up to the taxable maximum of $160,200 (in 2023). If you are self-employed, you pay the entire 12.4%. While some may think that their own contributions are held in a personal account just for them to use in the future, their contributions are actually used to pay for the benefits of current retirees. Right now, the imbalance is due to the number of covered workers being less than the number of retirees. Without congressional action, retirees and other beneficiaries of the program could see a reduction in their benefits. If you are a Millennial or part of Gen Z, you may fear receiving no benefits at all. What solutions are on the table and which of those solutions do most Americans support?

Social Security has had two solvency crises in the past – 1977 and 1983. In 1977, legislators fixed the problem by raising the payroll tax rate and the maximum taxable wage base. In 1983, they raised the full retirement age from 65 to 67, phasing it out in over four decades. While today’s Republicans favor postponing the age at which a retiree can begin receiving Social Security benefits, Democrats favor taxing higher earners. Specifically, Democratic proposals include, reapplying the payroll tax on wages over $400,000, raising the cap to $250,000, and imposing additional taxes on capital gains, and net investment and business income. It is estimated that reapplying the payroll tax to incomes over $400,000 would eliminate 61% of the shortfall. Raising the payroll tax cap was supported by 81% of respondents surveyed by the University of Maryland’s Program for Public Consultation in April and May of 2022. 81% of respondents also favor reducing benefits for high earners by means testing benefits. Gradually raising the retirement age, which would reduce 14% of the shortfall, was supported by 75% of the respondents. What would you do?

A new virtual tool called “The Social Security Challenge,” offered by the nonpartisan American Academy of Actuaries, lets you explore the causes of the trust fund’s shortfall and decide exactly what changes you would make to fix the problem. Perhaps voters armed with this information can persuade their representatives to take the appropriate action. Check out the web app here: https://www.actuary.org/socialsecurity.