A recent update has provided new insights into the financial outlook of Social Security.
This month, the government marked the 90th anniversary of the Social Security Act’s enactment. However, the program might experience significant changes before it turns 100.
Each year, the Social Security Committee releases a report that assesses the financial condition of the program. This includes projections spanning 75 years for both Disability Insurance (DI) Trusts and Old-Age and Survivor Insurance (OASI) Trusts, the latter being responsible for providing retirement benefits to over 60 million Americans.
Regrettably, the forecasts suggest that, without intervention from Congress regarding the Social Security Act, these individuals could face major benefit reductions. A report from the trustees published in June indicated that the trust could be completely depleted by early 2033, at which point it would only be able to pay about 77% of the scheduled benefits.
In August, we received further updates from Social Security Chief Actuary Karen Glenn, who discussed new factors impacting future earnings.
What’s Causing Financial Woes for Social Security?
Before diving into the specifics of Glenn’s update, it’s crucial to grasp why the Social Security Trust Funds are running out of money.
Since 1937, Social Security has been collecting taxes from American salaries, placing these funds into a trust for future benefits. Meanwhile, trustees invested the funds in secure government bonds, earning some interest on them.
Initially, when benefits were paid out in 1940, the program received more revenue than it disbursed. This positive balance was supported by a growing working-age population and a booming economy. It all seemed quite stable as the baby boomers joined the workforce, leading to a surplus during their working years.
Yet, times are changing. People are living longer, and the growth in the working population isn’t keeping pace. With many baby boomers retiring, the ratio of retirees receiving benefits to working Americans has shifted, resulting in the OASI Trust experiencing deficits for the last three years.
That deficit is likely to worsen in the years ahead as more retirees begin to collect benefits and income sources do not keep up. Social Security’s revenues stem from wage taxes, investment interest, and taxes on benefits. Unfortunately, recent legislation has negatively impacted one of these revenue sources for retirees.
Recent Insights from the Chief Actuaries of Social Security
Senator Ron Wyden reached out to Chief Actuary Glenn to evaluate the effects of recently passed tax laws on Social Security. One significant aspect of the new law doesn’t directly lower Social Security income taxes, but it does extend tax cuts from 2017, add tax credits for seniors over 65, and reduce taxes on some Social Security benefits.
Glenn found that the new tax law actually decreases the revenue collected by Social Security, projecting a cost increase of $168.6 billion over the next decade due to this shift. Consequently, the OASI Trust Fund is now expected to be exhausted by late 2032, rather than early 2033 as previously anticipated.
While Glenn did not specify how benefits might change under the new tax regulations, retirees should prepare for cuts similar to the 23% outlined in the trustee’s full report. The new tax law is only set to last until 2028 before reverting to the pre-2018 tax framework. However, it’s essential to note that the demographic trends driving deficits are only getting worse. In simpler terms, reductions in benefits seem to be escalating each year.
Should You Be Worried About Social Security Cuts?
Under current law, Social Security is not allowed to pay out more than it collects. Once the trust funds are depleted, benefit reductions will occur unless Congress takes action.
Congress could implement measures to bolster Social Security and make changes for long-term financial stability, but it’s better to act sooner rather than later.
Sadly, Congress appears to be heading in the opposite direction. While the new tax law touts benefits for seniors, it doesn’t adequately assist those who are most in need. Meanwhile, it hastens the timeline for when all retirees will face reduced benefits.
Given how pivotal Social Security is for many voters, it’s unlikely that Congress would allow the program to fail completely. Yet, focusing on short-term benefits over the program’s long-term viability suggests that lawmakers may choose to postpone tougher decisions for a while longer. As mentioned, Social Security could look quite different by the time it turns 100.
