To many Americans, Social Security benefits are the primary source of their income upon retirement. However, many people are now beginning to hear bad news about the future of the Social Security Trust Fund. Currently, there are concerns that the fund may run dry in the next few decades and this will mean that benefits will have to be reduced.
If you’re close to retirement or already receiving benefits, you might be wondering: What would be the percentage reduction of your Social Security benefits if the fund runs out of money?
What Does “Insolvency” Mean for Social Security?
The term “insolvency” can have a rather negative connotation when people hear it. However, it is crucial to define what this concept includes when discussing Social Security. This does not mean that the Social Security program will cease to exist or have no funds at all. Instead, it means that the Social Security Trust Fund which is used to make payments will not have enough funds to make full payments as agreed.
The Social Security program is financed mainly by payroll taxes paid by employees and their employers. These taxes are paid into the Social Security Trust Fund which then uses the money to pay benefits to the elderly, disabled, and survivors. However, as the population ages and more people start to receive benefits, the benefits paid are projected to surpass the revenues collected from taxes.
Today, according to the estimates made by the Social Security Administration (SSA), if no reforms are made, the trust fund will be exhausted in 2034. After that, Social Security would continue to collect payroll taxes, but the revenue would be sufficient to pay only 77-80% of the expected benefits. This is what is commonly referred to as insolvency.
How Much Could Benefits Be Reduced?
If the Social Security Trust Fund becomes insolvent, benefits would be automatically reduced to match the income coming in from payroll taxes. As it stands now, beneficiaries can expect to receive between 20-23% less in their payments.
For instance, if you are currently receiving $1500 per month from social security benefits, then a 20% cut will slash off $300 from your monthly benefits and you will be receiving $1200. In a year, that will be a reduction of $3,600.
The cuts would not completely eradicate Social Security benefits but they would considerably impair many people’s capacity to meet their basic needs. This would especially affect the retirees who depend on their Social Security for their income sources.
What Can Be Done to Prevent Insolvency?
The good news is that solutions are available to fix Social Security’s funding problems before the trust fund is depleted. But it will take legislative intervention to alter the program in any way. Some of the potential proposed solutions include:
- Raising payroll taxes: A possible solution could be raising the portion of income that employees and employers are required to contribute towards Social Security to improve funding for future benefits.
- Raising the retirement age: Another possibility is to increase the full retirement age – this means that people would have to work longer before being eligible for benefits. This could cut down the number of years that individuals receive benefits and thus decrease the amount of money spent on the program.
- Reducing benefits: Some recommendations include cutting benefits for future retired individuals, particularly those with high lifetime earnings, to decrease the total spending on the trust fund.
- Increasing the taxable income cap: At present, only the first portion of income is taxed for Social Security. Lifting or removing this cap may help generate more revenue for the system.
Of course, none of these solutions are easy or popular, but they can help prevent Social Security from becoming bankrupt in the future. It will be up to legislators to decide how best to handle the situation and prevent the trust fund from going bankrupt in 2034.