There is a growing concern about the potential exhaustion of the Social Security Trust Funds by the year 2034, as projected by recent headlines. However, it is important to have accurate information to understand the potential implications if the Trust Funds were to run out. Under current law, the funds will not completely run out of money due to the continuous payment of FICA taxes by workers, which serve as the primary source of funding for Social Security benefits.
The Social Security Trust Funds, comprised of the OASI and DI Trust Funds, currently pay for about 20% of retirement, survivors, and disability benefits, supplementing the funds provided by FICA taxes. If the Trust Funds were to run out, benefits for existing retirees and beneficiaries would likely need to be reduced to a level supported solely by FICA taxes. The Social Security Trustees Report suggests that benefits could potentially be reduced by as much as 23% in total, although the specifics of how this reduction would be implemented are unclear.
There is no mechanism in place to determine how benefits would be reduced for specific retirees and beneficiaries if the Trust Funds were to run out. Possible methods include an across-the-board reduction for all recipients, protection of a minimum level of benefits with larger cuts for higher earners, or a reduction based on total taxable income. Congress would need to determine the distribution of any benefit reductions through legislation that would need to be passed with the president’s approval.
While there is no clear plan for how current and future retirees would be affected if the Trust Funds were to run out, it is likely that protections would be put in place for current retirees and older workers, based on past precedents. The government could prevent benefit reductions by passing legislation that may include increasing FICA taxes, reducing benefits, or finding alternative sources of funding. However, finding a bipartisan compromise that addresses the long-term financial sustainability of Social Security will be a challenging task for lawmakers.
Considering the popularity of Social Security and the potential impact on millions of retirees and disabled workers, politicians would face backlash if benefit reductions were to occur. It will be crucial for leaders to work together to find a solution that protects the future of Social Security, whether through benefit reductions, tax increases, or alternative funding sources. Individuals can take steps to protect their retirement by urging Congress to find a solution, saving and investing more, and carefully strategizing when to claim Social Security benefits. By staying informed and proactive, individuals can better prepare for potential changes to Social Security in the future.
