The Pending State of The Social Security Program and Its Implications for Your Retirement
The impact that the Social Security program has on the societal fabric of America is gargantuan. According to the Social Security Administration 2024 Fact Report, nearly 68 million Americans are receiving benefits in 2024, representing roughly 20% of the entire U.S. population. That proportion of Americans is set to increase in the years to come as the average age of the populace rises. In 2024, the Center on Budget and Policy Priorities estimates the program currently keeps 22.7 million Americans from falling below the federal poverty-line. Undoubtedly, the program’s vitality is imperative to the financial stability of millions.
Where The Program Stands
For context, it’s important to note that the Social Security program is comprised of two different trusts. The first is the Old-Age & Survivors Insurance program (OASI), responsible for paying insured workers and family members at retirement, as well as survivors of insured workers. The second is the Disability Insurance program (DI). It’s common to see these programs discussed interchangeably, combining the acronym into ‘OASDI’.
Also, both of these trusts are funded via three main levers. The first (and largest) lever of funding is payroll & self-employment taxes (FICA and SECA tax). The second lever is interest being earned on current reserves within the trusts (via investment into government-backed securities). The third lever is via income tax paid on benefits to higher-income beneficiaries of the program.
The Social Security Administration’s (SSA) 2024 Annual Report of The Board of Trustees gives insight into the forecasting of the program. The Board of Trustees is reporting that the OASI trust fund reserves are set to deplete by 2033. The DI trust fund is still expected to remain solvent for decades to come, unless new legislation is introduced that allows reserves from the DI trust to be allocated to the OASI trust. If that legislation hypothetically passed, then the combined reserves of the OASDI trust would not be set to deplete until 2035.
Nevertheless, Social Security retirement benefits are not expected to disappear, even if no legislative action is taken before 2033 to remedy the situation. Social Security is not going bankrupt. However, the Board of Trustees does estimate that varying benefit cuts to the program will ensue, dependent on if legislation is passed to allow for reserves from the DI trust to be re-allocated to the OASI trust.
If legislation is passed to allow for reallocation of funds between the two trusts, then by 2035, a 17% benefit cut to all beneficiaries across the board would take place. Alternatively, if the trusts continue to remain separate and the DI trust remains fully-solvent, an approximate 21% benefit cut is set to apply to all beneficiaries of the OASI trust. This is the current scenario in which the Board of Trustees estimates for the OASI trust reserves to exhaust by 2033.
Potential Modifications to Enhance the Program’s Viability
The Committee for a Responsible Federal Budget (CFRB), a non-partisan organization that educates on matters of fiscal policy, has outlined several proposed solutions for addressing the funding gap. Their interactive tool, The Reformer, allows individuals to assess the financial implications of various policy proposals.
The following are several potential proposals as put forth by the SSA and CFRB for eliminating the funding gap:
Increase Full Retirement Age: The Full Retirement Age (FRA) is currently age 67 for all individuals born in 1960 and beyond. This is the age at which beneficiaries of the program can claim their full retirement benefits without reductions. The CFRB’s Reformer tool estimates that increasing the FRA to age 68 over a span of years for individuals born after 1960 would close the funding gap by 13%.
Increase The Social Security Payroll Tax (FICA & SECA): At the time of the publishing of the 2024 Annual Report of The Board of Trustees, the SSA noted that a 3.33% increase to the current 12.2% payroll tax would close the funding gap by 100%. This increase in payroll tax would be split evenly between employees and employers alike, as is currently the case.
Increase the Taxation of Social Security Benefits: Currently, varying tax rates are applied to the Social Security benefits of recipients with total income above specific thresholds. The subsect of Americans paying into this tax are generally receiving income from other streams as well (work-income, pension-income, and/or other investment-income). Introducing additional tax thresholds, and/or increasing the taxes at the current wage thresholds, are talking points for reducing the funding gap.
Modify the Social Security Wage Base: In 2024, the initial $168,600 of earned income is taxed at the 6.2% rate for both employee and employer. Any income earned beyond this point is not taxed for Social Security purposes. This wage base is incrementally increased every year with inflation. There is the potential that this wage base will be dramatically increased at some point, or outright removed, in order to mitigate the program’s funding gap.
Other potential strategies include (but are not limited to): investing the trust funds into higher-yielding securities (such as equities); means-testing benefits for higher earners; taxing capital gains above certain thresholds for contributions into Social Security.
Navigating The Road Ahead
If you are a current retiree or plan to retire before 2033, the Social Security Administration expects to be able to pay full benefit amounts until then. Since the program is so vital, one (or a combination) of the strategies will likely be used to close the funding gap. As the government continues to enact changes into law, proactive planning shall become an ever-more powerful tool.
Consilio Wealth Advisors can guide individuals and families through the ever-changing fiscal policy landscape. Whether the program is adjusted via policy proposals such as tax hikes, benefit cuts, and/or other strategies, our team can work with you to model the changes in the context of your financial plan. Reach out today to start the conversation.
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