What Dangers Threaten Social Security Benefits?

Will Social Security collapse in a decade? No, but it will have to cut payments up to 21% for all current and future recipients in 2033 if no changes are made to the law before then.

In the 1970s various investment journals declared that Social Security would be unable to pay retirees what it promised and it would be insolvent by 2010. By 1983 Social Security was coming close to cutting benefits to retirees, so in 1984 President Reagan and Congress changed Social Security to make it solvent for the next two generations.

The changes extended the minimum retirement age from 65 to 67, taxing Social Security benefits for the first time, and deducting Social Security taxes from new Federal Employees’ paychecks for the first time. In addition, stricter rules to prevent fraudulent social security applications and claims were signed into law.

In 2022 Social Security began paying out more than it received in revenue. Today, in 2024, Social Security is projected to pay out approximately $170 billion more per year than it receives in revenue and this deficit will increase each year illustrating the urgent need for changes to Social Security.

The Problem is Shrinking Demographics

According to current projections, around 83 million people are expected to receive Social Security benefits in 2035. Currently, this total is just under 73 million people. Currently, 70 percent of social security benefits are paid to retired workers and families, and the balance is paid to disabled workers and survivors of deceased workers.

$1.5 trillion in benefits will be paid by the end of this year to retirees and other Social Security beneficiaries.     https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/

In 1940, the Social Security Administration (SSA) taxed employees 1.5% on each paycheck up to $3,000 annually, and businesses paid a 1.5% match. Now, the tax is 6.2%  for each employee and employer on every paycheck up to $168,000 in total annual earnings. Self-employed people pay 12.4 percent to SSA. https://www.ssa.gov/news/press/factsheets/HowAreSocialSecurity.htm

Retirees are living much longer. In 1940, a  65-year-old  retiree was expected to live until 79. Now that expectation is 84 years old. The number of Americans 65 and older will increase from about 61 million in 2023 to about 77 million by 2035.

What Are the Facts About Social Security Today?

When Social Security began in 1935, there were 42 workers per retiree. As the program expanded to cover more people (spouses and children of deceased retirees, disabled workers, etc.) the number of employees supporting retirees decreased.

By 1950,  the number of employees paying Social Security taxes supporting retirees dropped to 16. By 1960,  this number dropped to 5. By 2035, 2.4 employees will support each retiree with the Social Security taxes on each paycheck.

Americans are living longer, and this is putting a huge stress on Social Security since it was not designed to pay so many people living this long after retirement. Today, Americans on average live 14 years longer, retire three years earlier, and spend 20 years in retirement than when the program began. 

In 1920, less than 5% of people in the U.S. were 65 or older. By 2022, that percentage had grown to 17.3%. The United States population has been aging for decades. Yet, when the huge Baby Boomer population (born between 1946 and 1964) started retiring between 2010 and 2020, it was the largest 10-year increase of people 65 and older and up in US history. https://www.retirementliving.com/what-percent-of-the-u-s-population-is-over-65

There are Not Enough Taxes to the Support Current Level of  Social Security Payments

Social Security has two money sources, the Federal Old-Age and Survivors Insurance (OASI) Trust Fund and the Federal Disability Insurance (DI) Trust Fund. OASI and DI are both funded by payroll taxes. DI is the fund that directly pays current Social Security recipients. OASI is the fund that Social Security invests in special US Treasuries to earn interest. It is not tapped to pay Social Security when there are enough DI funds to pay all recipients. OASI is a kind of rainy-day fund and is the fund most often referred to when people claim Social Security will “go bankrupt”. OASI grew tremendously while baby boomers were working but several years after boomers began to retire, Social Security had to tap into the OASI and pay out billions of dollars to cover the insufficient payroll taxes. https://crsreports.congress.gov/product/pdf/RL/RL33028

According to the 2022 Social Security Administration (SSA) Trustees Report, the OASI program paid approximately $109 billion in 2022.

According to the 2023 Social Security Trustees Report, OASI is 80% likely to be depleted by 2033 if no changes are made to Social Security. At that time, OASI  is projected to have paid out all its remaining funds ($375 billion). https://www.ssa.gov/oact/tr/2024/IV_A_SRest.html

When OASI is depleted, Social Security won’t be able to pay all benefits expected. DI, however, will survive even if the government does nothing to restructure Social Security. Yet, with no changes Social Security payments could be cut to all beneficiaries between 17% and 21% in 2033.

Which Party Wants to Take Away Social Security?

Neither. Democrat President Truman increased Social Security benefits by 77%. Republican President Nixon increased benefits by 20% and also signed SSI into law. No other president came close to increasing social security benefits or programs by these amounts. Yet, every Republican and Democrat administration since the beginning of Social Security has either increased Social Security program benefits, added eligibility, or added protections to the program. The mudslinging by each political party that the “other side” wants to undermine or kill Social Security is merely political theatre. https://www.fool.com/retirement/2018/11/23/every-presidents-biggest-social-security-contribut.aspx

Has Social Security Faced Solvency Problems in the Past?

President Ronald Reagan made the most important changes to Social Security to ensure its long-term success, by signing legislation in 1983 that increased payroll taxes, raising the retirement age, and taxing a portion of Social Security benefits so Social Security would be solvent for almost another 40 years.

So, What Are the Most Likely Proposals to Save Social Security Long Term?

1. Raising the full retirement age.  People would work longer before they receive Social Security payments.
2. Increasing payroll taxes. Employees and employers would pay Social Security taxes above the current 6.25%. on each paycheck.
3. Means testing. This measures people’s income to determine who gets money from the government for one or more services. This would reduce or eliminate Social Security payments to higher-income people.

Other potential proposals are:

1. Reducing COLAs. This would reduce annual increases in payments to retirees that help counteract the impact of inflation.
2. Increasing Social Security taxes on higher-income people.
3. Investing some Social Security funds in the market. This might create a higher return for Social Security funds but may be a higher risk than US Treasuries.  

Social Security was designed for employees and businesses to pay for Social Security retiree benefits through taxes on paychecks. At one time there were 42 employees paying taxes to support one Social Security recipient. But by 2035 that number will have dropped to 2.4 employees per recipient.

Although Social Security was overhauled in 1983 to make it solvent again, this was only effective for two generations and it must be revamped again. If Congress bickers and argues over politics instead of working on a solution as was done on a bipartisan level in 1983, Social Security will cut payments up to 21% by 2033.

The most likely solutions to reform Social Security are raising the retirement age, increasing payroll taxes on employee paychecks, taxing higher-income employees’ paychecks at a higher percentage than lower-income employees, or paying a fraction or zero Social Security to higher-income employees upon retirement.

The bottom line is that the financial shortfall of funds in the Social Security program needs to be addressed immediately. A bipartisan commission would be a good way to address the many factors and people that would be affected by changes to Social Security. 2033 is only nine years away.