Last year (May 2022), we asked the question in this blog, “Will I be Able to Rely on Social Security when I Retire?” In our analysis of the then-current state of Social Security benefits, we concluded that while the future looks potentially dire for new and existing recipients, the political class is not about to let the most important retirement program in the most powerful country in the world fail its citizens.
Possible solutions for shoring up the program abound, so the real question is whether politicians will step up to do what’s necessary or continue to whine about it.
What Congressional Inaction Could Cost You
Last year’s analysis of the program projected that benefit cuts could commence in 2033, one year less than the prior year’s forecast when it’s expected that payroll taxes flowing into the system will not be sufficient to cover monthly payments to retirees.1
A more recent analysis doesn’t change that forecast. However, it places the potential outcome in stark terms by calculating the hit retirees will take in their financial lives. The analysis estimates that if nothing is done between now and 2033, no retirees will escape benefit cuts, but some will be hit harder than others.
For example, the average newly retired, dual-income couple could see their benefit reduced by about $1,450 monthly—a significant hit for couples relying partly on Social Security. Higher-earning couples could see a drop of nearly $2,000 monthly, while lower-earning couples would receive about $800 less.1
We can only hope that, when the politicians see the impact of their non-action in these real-world terms, they will be prodded to act sooner rather than later and deliver on the promise the country made to all Americans nearly 90 years ago with the enactment of the Social Security Act.
The Cost of Inaction Continues to Increase
The cost of their inaction has increased substantially just in the last few years, making it more challenging to find politically palatable solutions. While the program has been subject to rolling surpluses and deficits over the last several decades and was considered financially stable as recently as 2021, the trend going forward shows it is spiraling into widening deficits as far as the eye can see.
Massive pandemic-induced payroll cuts in 2020 and 2021 drastically changed the trajectory of program reserves, which had already been trending flat to down due to fewer workers paying into a system supporting more than 70 million baby boomers with expanding life expectancies.2
Making solving the impending Social Security crisis even more challenging for Congress is the mounting fiscal crisis brought about the convergence of rising debt and deficits with increasing interest rates. As reported by Bloomberg, the cost of servicing the astronomical U.S. government debt jumped by 25% in the first nine months of this fiscal year. Due to rising interest rates, taxpayers are now on the hook for $652 billion of interest payments on nearly $33 trillion of national debt, almost as much as the country spends on national defense.3
The federal deficit widened to $1.4 trillion in that same period, a 170% increase over last year.3 And with inflation boosting government spending, there’s no end in sight for the ballooning national debt unless Congress acts to reduce federal spending significantly.
That will be a decades-long battle of opposing forces in Congress that will coincide with deliberations over what to do about Social Security. The question is whether the folks in Congress can walk and chew gum simultaneously.
Congress Knows What Must be Done
Frustratingly, Congress knows what it has to do. There are several options on the table, which, if put into action today, could conceivably address the potential shortfall.
- Raise the taxable wage cap or do away with it altogether.
- Increase the payroll tax employers and employees pay on earned income.
- Raise the minimum retirement age from 62.
- Raise the full retirement age to 70.
- Some combination of the above
While none of these options are ideal, they will hurt far less if done partially in some combination and phased in over time. If acted on now, they will raise enough tax revenue to close the funding shortfall and restore the surplus. It may even allow for an increase in the COLA calculation as well as the minimum Social Security benefit level.
As we said last year, if these actions are taken now and gradually phased in, those near or even 15 years away from retirement shouldn’t be concerned. Current retirees should not be affected by any of the proposed measures. However, the younger generations—Millennials and Gen Z—should take a look at their retirement plans to make adjustments to planning assumptions. But, with enough time, those adjustments may only be minor.
Congress Saved Social Security Once—It Will Do It Again
The country has been here before. Revenue shortfalls plagued Social Security in the 1970s, and even though Congress teetered on inaction then, they finally came through with a reform package signed by President Reagan in 1983 that extended the trust fund’s depletion date by 51 years—through 2034.4
We believe Congress will do its fiduciary duty again and act to restore the Social Security trust fund to secure the financial safety net for future generations. We’d just like them to act sooner rather than later.
In the meantime, this should be a call to action for everyone to work with their financial advisor to reexamine social security’s role in their retirement income plans and shore up any potential gaps.