Q: I’m nearing retirement, but I’m worried about Social Security’s financial health. How likely is it that I won’t receive my full benefits? What should I be doing now to protect myself from potential benefit cuts?
A: Your concern is all-too-common, especially as the health of the Social Security system is increasingly viewed through a political lens. That really is a shame.
In May, the trustees of the Social Security system published their 2024 annual report. Each year, their report only shows subtle changes in the financial picture. Given the inherent, long-range set of assumptions used in their analysis, it’s a system that isn’t designed for abrupt changes over time.
Now, it’s true the Social Security “trust fund” is projected to be “depleted” in 2033. That’s the headline that gets the most attention each year. However, the term “depleted” is too strong. This simply means that, with no changes, the excess revenue that the Social Security system has accumulated over past decades will officially be used up. If there are no changes made to the level of benefits paid or the payroll taxes collected, in 2033 Social Security payroll taxes will only be sufficient to pay about 80% of the promised benefits.
On the surface, an immediate 20% in benefits is not a comforting thought. But, of course, the supposition that absolutely no changes will be made is wildly unrealistic. It’s just not going to happen. Too much is at stake and the solutions are too obvious.
Changes to Social Security will undoubtedly be made to both the long-term funding model and the benefit side of the equation. Fortunately, the changes that will be made will only need to be relatively minor. “Fixing” Social Security is akin to navigating a ship across the ocean. Small course corrections can lead to a vastly different destination. Long-range financial projections for Social Security are highly impacted by very small tweaks.
According to the most recent report, if the only dial to turn was Social Security’s funding model, all it would take to reset its course is to boost the dedicated payroll tax rate from the current 12.4% of wages (combined employer and employee contributions) to a level closer to 15.7% of wages.
Naturally, there is another dial to turn besides raising payroll taxes. Small changes to the benefit formula could take multiple forms. For example, making a change in how the annual cost-of-living adjustments are calculated is a particularly gentle way to alter the system’s long-run trajectory.
If I had to guess, I expect our elected officials to form a non-partisan “blue-ribbon commission.” That seems just like the kind of politically easy route they love to take when decisions simply must be made. But, don’t hold your breath quite yet. We still have a few election cycles ahead of us!
