Washington wants to make a big change to Social Security. Here’s what retirees need to know.
So what? This shortfall cut into the Social Security Trust Fund (i.e. the source of Social security benefits), and the board says the problem will persist indefinitely unless changes are made to the program. This means that the Social Security trust fund balance will decrease each year until the asset reserves are finally depleted.
Given the complex nature of the variables involved, it is impossible to predict exact year of insolvency. But the board believes it will happen between 2031 and 2069, with its best estimate being 2035. That means Washington lawmakers could have less than a decade to find a solution.
Here’s what retired workers need to know.
The Social Security Program Won’t Go Away
Many Americans worry about the future of Social Security. In fact, 33% of adults not currently receiving benefits believe they will never see a penny from the program.
This particular fear is exaggerated. Payroll tax revenues will cover 80% of planned benefits in 2035, even if the trust fund is depleted by then, according to the board. This means that the Social Security program is not going away.
Social security is the main source of income for most American retirees, a 20% pay cut would still be problematic. But government officials are well aware of the situation, and politicians have already offered a wide range of potential solutions.
Rising revenue from payroll taxes could delay insolvency of trust funds
Broadly speaking, there are only three ways to avoid trust fund insolvency. The social security program can increase income, reduce costs, or decide on a combination of these two options. Unsurprisingly, many politicians would rather increase funding than cut benefits. While there are several ways to do this, the most common proposal is to apply Social Security’s 12.4% payroll tax to a larger portion of total income.
For context, the maximum limit of taxable gains is $160,200 in 2023, so any income over that threshold is not taxed by the Social Security program. According to the Social Security Administration, about 6% of workers earn enough money to exceed the taxable limit, and their collective earnings make up about 19% of total income in the United States. In other words, the Social Security payroll tax is currently applied to 81%% of all income, leaving room to increase program income by taxing high earners more heavily.
In 2021, Rep. John Larson (D-Conn.) introduced a bill known as Social Security 2100: A Sacred Trust. Among other changes, the bill proposes to apply the 12.4% payroll tax to all income over $400,000. But some lawmakers want to be even more aggressive.
For example, in 2022, Rep. Peter DeFazio (D-Ore.) and Sen. Bernie Sanders (I-Vt.) introduced the Social Security Expansion Act. This bill would apply the 12.4% payroll tax to all income over $250,000.
Both bills would create a donut hole between the specified income threshold (i.e. $400,000 or $250,000) and the taxable limit. But this gap would close over time because the taxable limit increases each year to keep pace with changes in general wage levels. In other words, all income would eventually be subject to the Social Security payroll tax.
These changes alone would not solve the problem
According to the Office of the Chief Actuary, if the 12.4% payroll tax were applied to income over $400,000 beginning in 2024, the depletion of the trust fund would be delayed until 2048. Similarly, if the 12.4% payroll tax were applied to income over $250,000 beginning in 2023, the depletion of the trust fund would be deferred to 2063.
Taxing more of the income is a good start, but it would not prevent the insolvency of trust funds, at least not by itself. Lawmakers will need to take further steps to ensure that benefits remain payable in full, and the long-term solution will likely involve a mix of increased income and cost reduction measures.
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