Social Security is a vital source of income for many retirees. But that revenue stream is in trouble.
Social security cuts may be on the table by 2035. That is, unless lawmakers intervene. But whether they take action – and do it on time – are the big questions.
Why is Social Security so bad?
The Social Security Administration has long known that its finances are far from solid. And now the program is getting closer to the point where austerity can become a reality.
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The problem is that the program gets most of its revenue from payroll taxes. But in the coming years, that income stream will shrink as baby boomers leave the workforce en masse.
Those retiring workers will be replaced by incoming workers, but Social Security administrators are still forecasting a deficit. And while the program can tap its trust funds to close that income gap, distributions become an option once those funds are exhausted.
In their latest report, the Trustees predicted that the program’s trust funds would run out of money by 2035. That’s actually an improvement over previous projections, which put that date at 2034.
In fact, many people expected that exhaustion date to be earlier in light of the massive unemployment crisis that took place in the wake of the pandemic. In 2020, millions and millions of people were unemployed, and that meant they weren’t paying Social Security. So the fact that we’re seeing that 2035 date is actually an improvement over what could have been.
But once those funds are exhausted, distributions may be the only option unless lawmakers come up with a solution. But will they?
Nobody wants a poverty crisis
There are many seniors today who get all or most of their income from Social Security. For those people, cutting benefits could trigger a major poverty crisis. That’s not something lawmakers want, so obviously they’re willing to do a lot to avoid it.
But what can (or will) they do? And when does the Social Security funding gap become a priority?
The administrators of the program have been warning about this matter for years and so far no action has been taken. And while it’s easy to argue that we won’t be looking at benefits until 2035, and it’s not until 2022, the reality is that changes to the program to avoid those cuts can’t wait 13 years. They need to happen sooner, possibly even today.
One solution, for example, is to reduce the full retirement age, meaning that seniors can receive their benefits in full without a discount. Currently, that age is 67 for anyone born in 1960 or later.
Lawmakers have proposed extending that age to 68 or 69, and it’s a reasonable solution if they make it official soon. If they don’t, it just won’t work, namely because it will be very difficult to tell seniors that their full retirement age is changing without warning.
Another solution is to abolish the wage ceiling for social security tax. Currently, income over $147,000 is not taxed to fund the program. That is another option that could really help in solving his financial problems. But lawmakers can’t wait for the trust funds to hit their last dollars to make that happen.
All things considered, lawmakers have the power to prevent benefits, and it is largely in their best interest to take action and prevent a scenario where millions of seniors are plunged into poverty. But the fact that they haven’t acted yet is disturbing. And if they wait too much longer, we can get to a point where benefits have to be cut, even if no one wants to.
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