Coming Social Security shorfall should worry you Coming Social Security shorfall should worry you

THE COLOR OF MONEY

I'm frequently told by young adults that they're doubtful Social Security will have enough money to ever send them a monthly check.

"It won't be around when I get old," they say.

Older adults worry that the payments they are currently receiving will be cut because of a looming shortfall in the federal program.

Both generational groups are right to be troubled.

Social Security isn't projected to be bankrupt, as you may falsely believe. But the Old-Age and Survivors Insurance Trust Fund (OASI), which pays retirement and survivor benefits, will be unable to issue full benefits starting in 2033, according to the latest trustee reports for the Social Security and Medicare trust funds.

Here's what you should know about the financial state of Social Security and Medicare.

How is Social Security funded?

It's important to understand that Old-Age, Survivors and Disability Insurance (OASDI), otherwise known as Social Security, benefits not just seniors but workers who develop disabilities and families in which a spouse or parent dies. Medicare provides health care for Americans 65 and older. Medicare is also available for some people younger than 65 with disabilities or end-stage renal disease.

Social Security is funded through a payroll tax. It's part of the section on your pay stub that may be labeled as FICA, which stands for Federal Insurance Contributions Act. Employers and employees each pay 6.2% of wages up to the taxable maximum of $160,200 for 2023. If you're self-employed, you pay the entire 12.4% OASDI tax rate.

The current rate for Medicare is 1.45% for an employee and 1.45% for the employer, or a total of 2.9%. There's an additional 0.9% tax applied to some high-earners. Unlike the OASDI tax, there is no limit on the amount of income subject to Medicare taxes.

"The money you pay in taxes is not held in a personal account for you to use when you get benefits," the Social Security Administration explains. "Today's workers help pay for current retirees' and other beneficiaries' benefits."

Will Social Security run out of money?

If no actions are taken by Congress, yes, Social Security and Medicare face a significant funding shortfall.

"Social Security's total cost is projected to be higher than its total income in 2023 and all later years," the trustees' report said.

Each year, the trustees of the Social Security and Medicare trust funds issue reports on the current and projected financial status of the two programs. The 2023 reviews repeated a concern from previous years: There is more money going out than coming in.

The imbalance, the trustees explained, comes down to baby boomers. They are retiring at a much faster rate than the number of covered workers contributing to the program.

But there will be a fix - imagine the pandemonium if beneficiaries saw a 23% reduction in their monthly Social Security payments. Things would get ugly, fast.

I can picture busloads of seniors descending on the Capitol demanding their money.

"Because Social Security faces no imminent crisis, policymakers have time to carefully craft a financing package that minimizes cuts to the program's modest but critical benefits," the Center on Budget and Policy Priorities wrote in a blog post ahead of the release of the trustees' report.

How will seniors be affected?

At the end of 2022, the OASDI program was providing benefit payments to 51 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 9 million disabled workers and dependents of disabled workers.

Because of a cost-of-living increase of 8.7% in January, the Social Security Administration estimated that the average monthly Social Security benefits payment would be $1,827, up from $1,681.

Without intervention, the OASI Trust Fund will have only enough continuing tax income to pay out 77% of scheduled payments. Starting in 2031, Medicare's hospital insurance will be able to pay 89% of the scheduled benefits for hospital services. The Disability Insurance (DI) Trust Fund is projected to be able to pay 100% of total scheduled benefits through at least 2097.

However, I suspect Congress will step in before any benefits are reduced. But the uncertainty could still make for some scary years ahead.

Will Social Security be around when I retire?

I have no doubt Social Security is here to stay. Without it, millions of seniors would fall below the poverty line.

The poverty rate for people 65 and older increased from 9.3% from 2012 to 2016 to 9.6% from 2017 to 2021, according to the Census Bureau.

Last year, 55% of retirees said they rely on Social Security as a "major" source of income, according to a Gallup poll.

There will be a fix. The question is how financially painful it will be.

A number of options have been discussed to solve Social Security's problem, including increasing the age at which the full retirement benefit can be collected. The full benefit age is 66 years and 2 months for those born in 1955. It increases gradually to 67 for those born in 1960 or later.

One idea is to increase the full retirement age to 70. Such a move is predicated on people working longer. But what if that's not possible? Congress would do well to consider what happened in France, where protests erupted over plans to raise the retirement age to 64 from the current 62 before people can retire with a full pension.

Another possible solution might involve increasing the income cap for OASDI or eliminating it.

Understandably, you may be concerned about the solvency of Social Security. But while we wait for a resolution, don't let fear drive you to a decision that may not be in your best interest long-term.

Many people can't afford to delay taking Social Security. But if you can, keep in mind the longer you wait to start Social Security, the more you collect each month. If you claim early at 62, there's a reduction of as much as 30%. Every year you delay beyond your full retirement age up to 70, you get an 8% increase in your benefit.

Michelle Singletary is a personal finance columnist for The Washington Post. Her column runs on Sunday.