Social Security issues looming

Higher taxes, benefit cuts, or a combination of both loom in a future scenario that is no longer all that distant. Congress still has time to make fixes to shore up the retirement system but hasn’t shown any such resolve. Here are answers to six key questions on what might happen:

Q: The latest projection shows Social Security’s reserves will run out in 2033. What does that mean?

The Social Security system has two trust funds that hold surplus money accumulated in prior years — one for Old Age and Survivors Insurance and one for Disability Insurance. The retirement-focused OASI fund will be depleted by 2033, according to the latest estimate by Social Security’s trustees. The much smaller DI program isn’t expected to run out and combining the two funds would delay their depletion to 2035, noted the Center for Retirement Research at Boston College in a new analysis. But combining the two also would require a change in the law, which is unlikely, making 2033 the relevant year.

The trust funds are U.S. Treasury accounts holding accumulated surpluses, which are expected to run dry eventually. That’s nothing new. However, “Whereas we used to have 68 years to figure out how to avoid depletion,” the Boston College report said, “we now have nine years.”

Q: Will Social Security eventually go broke?

No, but the retirees and others who rely on Social Security could be seriously pinched. If Congress doesn’t shore up the trust funds or make other fixes, the Social Security Administration would need to cut benefits by about 21% to match the level of payroll taxes and other revenue flowing in at that time.

“Depletion of the trust fund does not mean that OASI has run out of money,” stated the Boston College report. “At the time of the depletion, payroll tax revenues (would) keep rolling in and can cover 79% of currently legislated benefits.”

Q: Would retirees have trouble making ends meet?

Many would. For a typical person at age 65, Social Security benefits currently cover about 36% of pre-retirement earnings. That would drop to 29%, “a level not seen since the 1950s,” according to the Boston College analysis.

Social Security was never intended to pay for everyone’s full expenses in retirement — that’s where personal savings, home equity, workplace 401(k) plans, and other assets come in. Millions of current and future retirees could absorb a benefits cut, but those who rely on Social Security for most or all of their income could drift closer to poverty levels. Congress might shield these people by shifting most of the benefit cuts toward more affluent recipients.

Q: What about investing some trust-fund assets in the stock market?

That proposal has been debated for decades and, in retrospect, could have been a wise option, given the stock market’s record of generating annual gains of 10% to 11% over the long haul. However, there are also valid concerns, such as the potential for politicians to decide which stocks could be chosen for investment and the possibility that Social Security’s huge cash inflows and outflows could distort market trading.

Also, the market can be painfully volatile at times, but stocks generally have stood the test of time. “Indeed, if Social Security had begun investing 40% of its assets in equities in 1984 or even 1997, the trust fund would not be running out of money today,” according to the Boston College report.

Stocks remain a possibility, “But to take advantage of this option, Congress has to act sooner rather than later before the trust fund hits zero,” the analysis said. Currently, the reserves are worth $2.6 trillion.

Q: What other problems have resulted from Congress’ failure to act?

The policy of doing nothing “undermines Americans’ confidence in the backbone of our retirement system and causes some to claim their benefits early, hoping that those on the rolls may be spared future cuts,” the Boston College report said. Worse, inaction will result in more severe, future benefit cuts while spreading the pain less equitably. The longer the delay, the more the burdens of tax increases or benefit cuts fall on millennials and younger generations.

Both political parties largely have shied away from making the tough decisions to fix the problem, as have presidential contenders Donald Trump and Joe Biden. Yet pledges not to touch the system are akin to endorsing future benefit cuts, noted Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

Q: What are realistic fixes for the program?

Other options for closing the gap range from raising the retirement age to slowing cost-of-living adjustments to subjecting more of the compensation of high earners to payroll taxes. Ultimately, the choices come down to some combination of higher taxes and benefit cuts. Workers and employers already pay a combined 12.4% to support Social Security (plus 2.9% for Medicare), and even more might be needed.

How much more? “If payroll taxes were raised immediately by 3.5 percentage points — 1.75 percentage points each for the employee and the employer— the government could pay scheduled benefits through 2098, with a one-year reserve at the end,” predicts the Boston College analysis.