Key Points
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Based on recent projections, Social Security faces cuts as early as 2035.
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A broad reduction in benefits could thrust countless seniors into poverty.
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Lawmakers have options for steering Social Security away from sweeping cuts, but each solution seems to come with its own built-in problem.
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There’s a rumor circulating that Social Security is headed toward bankruptcy. And thankfully, that rumor isn’t true.
Social Security can’t completely go bankrupt because it gets funded by payroll taxes. So unless lawmakers decide that workers no longer have to pay into Social Security, the program can collect a decent amount of revenue.
The problem is that in the coming years, Social Security expects to owe more in scheduled benefits than it collects in payroll taxes. This is due to the double whammy factor of baby boomers retiring in droves and also filing for benefits while the number of replacement workers entering the labor force falls short.
Social Security has trust funds it can use to keep up with its benefit payments during this time. But the most recent Trustees report has the program’s trust funds being emptied by 2035. So conceivably, that’s the year benefit cuts could arrive.
But benefit cuts could plunge countless seniors into poverty, and that’s a crisis lawmakers will no doubt be eager to avoid. And the good news is that they do have options for preventing Social Security cuts. But unfortunately, each of these so-called solutions that’s been tossed around has an unwanted flipside.
Pushing back full retirement age
One option for preventing Social Security cuts is to push back full retirement age (FRA), which is when seniors can collect their complete monthly benefit without a reduction. Right now, FRA is 67 for anyone born in 1960 or later. If lawmakers were to phase in a later FRA for younger workers, it would no doubt put less of a strain on the program.
The issue here is that making this change to FRA effectively sentences workers to more years in the labor force, since many people can’t afford to retire without Social Security. And also, depending on how this change is phased in, it could wreak havoc on the plans of older workers who are closer to retirement.
Increasing the Social Security tax rate
Workers currently pay Social Security taxes to the tune of 12.4%. Increasing that tax rate would clearly do the job of pumping more money into the program.
But the downside is that higher taxes burden working Americans. And the more taxes workers have to pay, the more reliant on Social Security they may need to become in retirement. That’s because dollars spend on taxes could represent money that isn’t being saved for retirement.
Also, that 12.4% tax is split evenly between employers and employees. If employers have to bear higher costs, they might have to cut corners elsewhere — such as reducing employee benefits.
Lifting the wage cap
There’s an annual wage cap put in place for Social Security tax purposes. This year, it’s $176,100, and wages beyond that point aren’t taxed.
Another option for preventing benefits cuts is to raise the wage cap for Social Security taxes or get rid of it altogether and force workers to pay into the program on all of their income, no matter what it amounts to. But this opens a can of worms, because Social Security calculates retirement benefits based on worker contributions.
Forcing workers to pay more into the system would, to keep things equitable, mean forcing Social Security to raise its maximum monthly benefit. Whether the program would then net any positive results is questionable.
All told, lawmakers have their work cut out if they want to prevent Social Security cuts. But given the poverty crisis that could ensue without intervention, it’s clear that they’ll need to put their heads together over the next 10 years and figure something out.