Social Security Will Lose 20% of Funds by 2032 – What Does That Mean for You?

No matter where lawmakers stand on the future of Social Security, there is almost universal agreement that the program faces funding challenges that need to be addressed. Sometime by the middle of the next decade, one of the trust funds that helps pay for Social Security will run out of money, leaving more than 20% of the program unfunded.

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This creates both a math problem and a political problem. The math problem is how to ensure that current and future Social Security recipients get the money they need in retirement. The political problem is how to fix the situation.

The vast majority of Social Security benefits — roughly 75% — are funded through payroll taxes contributed by both employees and employers. The rest comes from the Old-Age and Survivors Insurance (OASI) Trust Fund. This is a surplus of money that has built up over decades, mainly due to the large number of working baby boomers who paid into Social Security through payroll taxes.

But with so many boomers now retired, that surplus is disappearing. Payroll taxes are expected to generate $1.56 trillion this year, while the combined costs of Social Security and Medicare are likely to be $2.16 trillion, AP reported. Because of this ongoing shortfall, the OASI fund is due to run out of money sometime next decade.

The Congressional Budget Office’s latest estimate is that Social Security will be unable to pay full benefits to recipients beginning in 2032 — a couple of years earlier than estimates from both the Social Security Board of Trustees and the CBO’s prior estimates.

When the OASI is tapped out, Social Security recipients face a roughly 20% reduction in benefits, according to the CBO. That gap would rise over time until benefits become about 35% smaller by 2096. After that, the gap would remain stable.

The challenge now is figuring out how to deal with the gap. There are essentially three options that don’t involve funding Social Security through other government revenues: cut benefits, raise more money through Social Security payroll taxes or raise the full retirement age. Potential fixes could involve one of the three options or some combination of them.

Immediately cutting benefits by 20% or more would likely have a major financial impact on millions of seniors who rely heavily on Social Security. As Wall Street 24/7 recently noted, many seniors would descend into poverty, which would have a ripple effect on the economy because a large group of older people would have less discretionary spending money.

Another potential problem with reduced Social Security benefits is that it would increase demand for affordable housing — something that is in short supply right now and would likely require government subsidies and many years of development.

Given these issues, cutting Social Security benefits is off the table for most lawmakers, at least for now. Both President Joe Biden and U.S. House Speaker Kevin McCarthy (R-Calif.) recently said they don’t support cutting Social Security or Medicare benefits.

Some lawmakers — mainly Democrats — have proposed raising the Social Security payroll tax rate from its current 12.4% to 15.6% or more following the trust fund depletion, and then gradually increasing it to about 17% by 2095. Another way to raise more revenue from Social Security payroll taxes is to increase the amount of earnings subject to taxation. In 2023, any yearly earnings above $160,200 are not subject to Social Security taxes. Among the proposals is to raise that threshold to $250,000 or higher.

But anti-tax lawmakers are unlikely to support any initiatives that involve putting a bigger tax burden on workers, so they’ve proposed raising the full retirement age as a way to reduce spending on Social Security.

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A plan released last summer by the Republican Study Committee would realign the Social Security full retirement age to account for increases in life expectancy. Doing this means the FRA for Social Security would increase to age 70 from the current FRA of 66 and 67 years old.

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This article originally appeared on Social Security Will Lose 20% of Funds by 2032 – What Does That Mean for You?

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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