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Social Security Showdown

Congress must act if we are to avoid a substantial reduction in monthly benefits in 2033

By Harriet Edleson

If you have already claimed Social Security retirement benefits or are planning to claim yours soon, beware of a looming problem.

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Part of the reason for the looming revenue shortfall stems from the age distribution of the U.S. population. More and more baby boomers are claiming benefits, while younger Americans, a smaller group of workers, pay into the system.  |  Credit: Getty

Unless Congress acts to shore up the Social Security Trust Fund, retirement benefits could be cut for everyone in 2033 — even those already receiving monthly benefits.

Baby boomers — Americans born between 1946 and 1964 — have been claiming or are starting to claim retirement benefits just when the number of younger workers is declining. The result? Fewer dollars flowing into the reserve that partially funds Social Security.

Because there were far more workers than retirees when the program began in 1937, the old-age fund collected $767 million but paid out only $1 million in benefits that year.

In short, the Social Security Administration manages two funds, the Old-Age and Survivors Insurance Trust Fund and the Disabilities Insurance Fund. The Old Age fund collects a tax, called FICA (which stands for the Federal Insurance Contributions Act) from current workers and uses the revenue to pay benefits to retirees.

Surplus Rises and Falls

Because there were far more workers than retirees when the program began in 1937, the old-age fund collected $767 million but paid out only $1 million in benefits that year. The Social Security Administration put the remaining $766 million in reserve, buying a special class of U.S. Treasury securities. It continued to build the reserve for decades.

The surplus peaked at $37.777 billion in 1977, when an economic recession reduced the number of workers who were paying into the system while more people who retired early or filed disability claims became eligible for benefits. After that, the surplus began to shrink.

If Congress and the President do not act to increase the amount of money available to Social Security, the surplus — and only the surplus — would  be exhausted in 2033, actuaries say. If we reach that point, Social Security would have to pay retirement benefits using only current FICA deductions. Those payroll deductions generate enough revenue to pay roughly 79% of scheduled benefits. Retirees, widows and orphaned children could see their monthly checks decline 21%.

Weighing the Options

The other fund is the Disabilities Insurance Fund, which pays those who are deemed disabled. If Congress were to vote to combine the two funds, that would postpone depletion of the reserves to 2035 and the combined trust funds would be able to pay 83% of benefits. That would mean a 17% cut in scheduled benefits.

This doesn't have to happen. There are several proposals that could shore up the Old-age and Survivors Insurance Trust Fund.

Members of Congress have introduced bills in the House and Senate but neither chamber has brought a bill to the floor for a vote. For example, the Social Security 2100 Act would shore up the trust fund for paying Social Security benefits by imposing a payroll tax on Americans earning more than $400,000 a year. Connecticut Democrat John Larson introduced a version of the bill in 2014, and others have been proposed since then, but the full House has yet to vote on it.

The shortfall, you may reason, is at least nine years away, so why worry now? The answer is that the sooner Congress addresses the issue, the more options it will have to shore up the programs' funds as well as more time to phase in changes gradually, experts say.

How are Social Security retirements benefits funded? There are three sources of revenue. If you haven't already, look on your pay stub for the box labeled FICA. This is the amount deducted from your paycheck and matched employers. If you are self-employed, you will pay the entire 12.4% rate. The funds are invested in Treasury securities, and the interest on those funds is a second source of revenue. Revenue also comes from taxes on retirement benefits.

Yet, according to the Congressional Research Service, 91% of the revenue comes from the payroll tax. At present, the payroll tax is capped at $168,600 of income. This means, Americans (and their employers) contribute to the payroll tax on the first $168,600 of their income. After that, they don't pay.

How Do We Fix This?

Essentially, there are three ways to ensure that Social Security remains solvent. One is to increase the rate of the payroll taxes or rise the cap on payroll taxes; another is to reduce benefits, typically by raising the retirement age; and a third is some combination of the two.

Social Security is "a vitally important part of every single American's life and retirement," Rep. Drew Ferguson (R-GA) said at a June 4 hearing before the House Ways and Means Subcommittee on Social Security. "It's important that we don't downplay how bad the situation really is."

"Congress does not seem to be moving toward a place of greater cooperation. I'm really concerned."

Part of the reason for the looming revenue shortfall stems from the age distribution of the U.S. population. More and more baby boomers — those born between 1946 and 1964 — are leaving the workforce and claiming benefits, while younger Americans, a smaller group of workers, pay into the system.

The Social Security Administration estimates that in 2023, there were 2.7 workers for each person collecting Social Security benefits. Trustees of the Social Security trust fund estimate that will decline to 2.3 workers for each beneficiary by 2035.

Another reason behind the shortfall is the increasingly unequal income distribution in the U.S. The top 6% of earners saw a 62% increase in their average earnings from 1983 to 2000, Stephen Goss, chief actuary at the Social Security Administration, noted at a National Academy of Social Insurance May webinar. Yet their contribution to Social Security is capped at $168,600. The rest of earners — 94% — experienced a 17% increase in total earnings over the same 17-year period. Congress had not anticipated such disparity when it amended Social Security in the 1980s.

A Lifeline for Working People

Why are Social Security benefits so important to retirees? For a certain percentage of beneficiaries — 37% of men and 42% of women — Social Security retirement benefits represented 50% or more of their income in 2023, according to SSA.

Goss, chief actuary at the Social Security Administration, said Social Security retirement benefits provide "a large life annuity not available anywhere else." Only half of Americans are enrolled in any defined benefit or defined contribution plan, typically a 401(k) plan. Of those, as of 2024, only 10% to 12% receive a defined benefit compared to 40% who did in 1979. While 401(k) plans fluctuate in value based on the equities markets, defined benefit plans are typically fixed.

The average monthly Social Security retirement benefit as of May 2024 was $1,916.63, according to the Social Security Administration.

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On an annual basis, using the most recent figures available, cutting benefits by 21% would mean a loss of $4,829.90 for the individual receiving the average annual Social Security retirement benefit.

What can baby boomers do to ensure their benefits will be paid in full and on time in the next decade and longer? In short, they can let lawmakers know how important their benefits are.

Those receiving retirement benefits and those planning to claim them soon are a "very strong voting bloc," according to Nancy Altman, president of Social Security Works, a nonprofit that works to protect and expand Social Security.

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Demand Congressional Action

Others, including Goss, believe Congress will pass legislation to shore up Social Security, as it did in the 1980s.

Jason Fichtner, chief economist with the Bipartisan Policy Center, is less certain. "We cannot guarantee that Congress will step up," he said. His approach is to "hope for the best but plan for the worst" when preparing for your retirement years.

Some financial planners factor in the possible cut in Social Security retirement benefits when discussing with clients their streams of income for their retirement years. "Congress does not seem to be moving toward a place of greater cooperation," Fichtner said. "I'm really concerned."

AARP, an advocacy organization for Americans 50 and older, urges its nearly 38 million members to send a message to lawmakers that "potential cuts to Social Security could put a massive strain on our pocketbooks and make retirement out of reach for millions of Americans."

"The political courage is not there right now to do it (pass legislation)," Fichtner said. "The public has to demand it."

Harriet Edleson
Harriet Edleson is author of the book, “12 Ways to Retire on Less: Planning an Affordable Future” (Rowman & Littlefield). A former staff writer/editor/producer for AARP, she has written for The New York Times, The Washington Post and Kiplinger's Retirement Report. Read More
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