Social Security is moving closer to a funding shortfall that could have a significant impact on millions of Americans, putting pressure on Congress to find a solution before retirees face potential benefit cuts.
The Social Security Administration projects the program will face a shortfall by 2032. Social Security benefits are funded through payroll taxes and trust fund reserves. But those reserves are projected to run dry.
“Retirees, near-retirees, even younger Americans should be very concerned about the health of Social Security,” said Brandon Arnold, executive vice president of the National Taxpayers Union.
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Laura Schultz, founding adviser at Preservation Retirement Services, said two major demographic trends are contributing to the problem: Americans are living longer and collecting benefits for more years, while lower birth rates mean fewer workers are paying into the system.
“Meaning that just the payroll taxes coming in, that's not going to be enough to fund 100% of folks' retirement benefits,” Schultz said.
What could happen to Social Security benefits?
Without action from Congress, Arnold warns recipients could eventually face a 22% reduction in benefits, or about $450 a month on average.
“If you're running for Senate right now, you're running for a six-year term. At the end of your term is when this problem is going to come to a head, and we're going to see benefit cuts,” Arnold said.
Congress has several potential options for addressing the shortfall, but each comes with political challenges.
Those options include allowing Social Security to borrow money, raising the retirement age, reducing benefits, or increasing payroll taxes.
The National Taxpayers Union supports the Promise Act, bipartisan legislation that would establish an independent advisory board tasked with developing a 50-year plan for Social Security.
“The Promise Act is one of the few bills out there, and again, it's a bipartisan piece of legislation that would advance this issue and hold their feet to the fire,” Arnold said.
The bill, however, is still early in the legislative process. It has been introduced in the Senate and referred to committee.
What consumers can do now
For people planning for retirement, the uncertainty surrounding Social Security is another reason to build savings outside the program. Schultz recommends contributing to a 401(k), IRA, or another retirement account as early as possible rather than expecting Social Security to provide all of your retirement income.
“Planning to rely just on Social Security, that is not going to be a solution, regardless of whether they raise the payroll taxes or reduce benefits or not,” Schultz said.
She said retirees should think about creating a pool of savings capable of producing income every month after they leave the workforce.
“You're used to just collecting one paycheck from your employer; you're going to get a paycheck from Social Security, but you're also going to have to pay yourself every month,” Schultz said. “So we have to have funds to generate that paycheck from.”
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Congress has confronted Social Security's long-term financial challenges before, often relying on commissions to recommend changes.
The Promise Act would take a similar approach by creating an independent group charged with proposing a long-term plan.
For consumers, the takeaway is more immediate: Social Security may remain an important piece of retirement income, but experts say it shouldn't be the only piece.
