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A Shortfall, Maybe – But Social Security is Not Going Bankrupt

By Jane Young, CFP, EA

The future of Social Security is a major concern for retirees and those planning for retirement. Social Security is facing a long-term shortfall, but the program is not going bankrupt. According to Stephen Goss, Social Security’s Chief Actuary, Congress will need to make some major changes to avoid benefit cuts of about 25% in 2035.  A Congressional Budget Office report released in December 2022 projected that the Social Security trust-fund reserves would run out in 2033, two years earlier than Social Security’s estimate.

Social Security is primarily a pay-as-you go program – today’s workers are paying benefits for current retirees. The money you pay is not held in a personal account for you to use when you start taking benefits, it is held in a trust fund to cover current Social Security benefits and administrative expenses.  Employers and employees each pay 6.2% of wages up to a maximum of $160,200 for 2023.  If you are self-employed, you pay the entire 12.4% in Social Security payroll tax.  

In 1983, legislation was passed to reform Social Security.  From 1983 to 2021, the program ran a surplus  - ultimately reaching a total of $2.9 trillion in trust reserves. In 2021, benefits paid out exceeded money coming in from payroll taxes. Social Security began depleting the reserves to cover this shortfall.  Payroll taxes still cover most of the benefits but about 20% comes from the reserves.  Without any major legislative changes, the trust fund will be depleted between 2033 and 2035.  However, Social Security will still be able to pay about 77% of the committed benefits from new payroll taxes.

The primary reason for the shortfall is demographics. The ratio of workers paying Social Security payroll taxes compared to those receiving benefits has gone from four to one in 1965, down to three to one in 2022, and is expected to drop to two point five to one in 2030.  In 2040, the ratio of people over age 65 to people ages 20-64 is expected to roughly double what it was in 2008.

Although Social Security is a political hot potato, it is likely that policy makers will eventually make some adjustments to avoid dramatic benefit cuts.  According to a Gallup poll in 2022, 55% of retirees said they rely on Social Security as a “major” source of income.  

Several options have been proposed to address the Social Security shortfall.  These include increasing the age at which full retirement benefits can be collected and increasing or eliminating the income cap on which Social Security is paid.  There also may be an increase in the cap on earnings without a proportionate increase in benefits for the additional earnings paid.

Regardless of the eventual solution, changes must be made to avoid a decrease in benefits.   Social Security is not going bankrupt but major changes are inevitable.