Social Security at a Crossroads

With the Social Security program in need of a legislative fix and Republicans in a strong position of power, might 2026 be the year the looming future shortfall is addressed?

Don’t count on it, financial experts say.

“I don’t believe there is any chance that Republicans will tackle any meaningful solutions to Social Security in the run up to the 2026 mid-term elections,” said Robert R. Johnson, professor of finance at Creighton University. “Social Security reform is a politically charged issue and won’t be dealt with prior to the mid-term election.”

While Congress is content to continue punting the problem to future legislators, clients need not worry about their Social Security benefits — yet, Johnson said.

Paraphrasing Mark Twain, Johnson said that “the imminent death of Social Security is greatly exaggerated.

“Social Security may certainly look different in the future, but it is, has been and remains an important financial backstop for individuals and I am hard-pressed to conceive of it completely going away,” he added.

But changes to the venerable program are inevitable.

The looming shortfall comes during a critical period in the program. The next five years will bring a pivotal shift in the demographic and economic landscape of Social Security as the last baby boomers join the first Generation Xers, who begin turning 65 in 2030.

“That will be a lot of pressure on the system just at a time when the financial stability of the program is being threatened by demographic, economic, and political upheavals,” noted Chris Orestis, president of Retirement Genius, a financial planning firm.

More than one problem

Being seven years away from the Social Security Trust Fund running short of money is the headline, but it isn’t the only problem facing the program. Here are five additional concerns facing the program going forward:

• Revenue vs. benefits imbalance. Payroll tax income is no longer sufficient to cover full benefits because of demographic shifts and slower wage growth.

The projected actuarial deficit over the 75-year long-range period is 3.82% of taxable payroll, the Social Security Administration reported in June, higher than the 3.50% projected in the 2024 report.

• Aging population pressure. As baby boomers continue retiring, the worker-to-beneficiary ratio keeps shrinking, adding stress to the system’s finances.

• COLA and inflation volatility. Cost-of-living adjustments have been fluctuating sharply with inflation, making planning difficult for retirees and the SSA.

• Equity and fairness concerns. Policymakers face pressure to balance sustainability with fairness for low-income workers, women and minorities.

• Integration with Medicare costs. Rising health care and Medicare costs indirectly strain Social Security finances and retirees’ purchasing power.

“It takes at least three workers to help sustain one person collecting Social Security,” Orestis said. “The problem is that the aging population keeps growing and living longer while the number of available workers paying into the system is not keeping up.”

‘A combination’ of fixes

Whether it happens next year or not, Congress will eventually have to address Social Security. What might the “solution” look like? Johnson has some ideas.

Several options are available, he said, and “will likely be a combination” of the following:

1. Raising the retirement age — the change would be phased in and wouldn’t likely affect those 62 and above approaching retirement.

2. Increasing the ceiling on the Social Security payroll tax — the current ceiling is $176,100.

3. Increase the number of working years used to calculate Social Security’s average indexed monthly earnings.

4. Tax all Social Security benefits of high earners.

5. Increase the payroll tax as a percentage.

Some of these options are politically distasteful for lawmakers on both sides, Johnson noted. While Republicans are loath to implement any tax-increase ideas, Democrats are generally united in their opposition to cutting benefits, raising the retirement age or privatizing the program by diverting funds to private accounts.

The Trump administration is not waiting for legislators to act on the disability benefits administered by The Social Security program. According to the Wall Street Journal, the administration is looking to cut disability benefits by removing age as a factor for eligibility or raising the threshold from 50 to 60.

According to the nonpartisan research institute Center on Budget and Policy Priorities, the Trump administration effort could reduce the share of applicants who qualify for Social Security disability income by 20%.

Advice to clients

Social Security remains a key retirement pillar for the large majority of Americans. While the deadline for action to save the program gets closer, advisors are not quite ready to recommend any long-range planning deviations.

The earliest age Social Security can be claimed is 62. Approximately 23% of men and 24.5% of women claim Social Security benefits as soon as they are eligible, the SSA reported, a figure that has been declining for several years.

Orestis fears that trend could reverse if enough Americans lose confidence in the long-term solvency of Social Security. It is generally a mistake to claim benefits early, he explained.

“People who elect to take their Social Security benefit at 62 are locking in the lowest monthly benefit they are entitled to for the rest of their lives, and many are driven by fear,” he said. “If a person were to wait until the age of 70 to start collecting benefits, they would be collecting almost twice as much compared to starting at 62.” 

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.