You may already be familiar with the fact that a significant Social Security trust fund is set to deplete within approximately a decade, potentially affecting a substantial portion of retirees’ benefits. However, quantifying the potential repercussions for Social Security recipients has been a challenging task until recently. Now, we have gained insight into the potential impact, with one estimate suggesting it could exceed $13,000 per month for certain couples.
According to a recent report by the nonprofit Committee for a Responsible Federal Budget (CRFB), once the Social Security Old Age and Survivors Insurance (OASI) Trust Fund becomes depleted, the typical newly retired single-income couple can anticipate an annual reduction of $13,100 in their benefits. This depletion is expected to occur in approximately a decade, after which Social Security will rely solely on payroll taxes for its funding, covering only around 77% of the current benefit levels.
Social Security Trust Fund Reduction on Retiree Benefits and Proposed Legislative Solutions
These benefit cuts will vary based on income. For instance, CRFB estimates that a low-income dual-income couple retiring in 2033 would face a yearly reduction of $10,600, while a high-income dual-income couple retiring in the same year would experience a substantial $23,000 cut in their annual benefits. For newly retired dual-income couples, the impact will be even more significant, as the CRFB projects a reduction of over $17,000 annually.
Social Security Benefit Reduction of $13,100 Anticipated for 2033 Despite the fact that the reduction for a low-income couple would be relatively smaller, it would constitute a more substantial portion of their overall income. This situation could result in a significant increase in senior poverty once the trust fund becomes insolvent, as highlighted by the CRFB.
Adjusted for inflation, the CRFB’s estimates indicate that a typical dual-income couple could face a $14,000 reduction, while low-income couples might see an $8,500 reduction, and high-income couples could experience an $18,500 decrease in their annual benefits.
It’s crucial to note that Social Security itself will continue to exist. The program is primarily financed through payroll taxes and will still be able to cover over 75% of current benefits even without the OASI funds. Nevertheless, several lawmakers have proposed various solutions to address the Social Security challenge, including benefit reductions or increased taxes. Here are some of their proposed ideas:
- Tax the Wealthy: Some legislators advocate raising the annual income threshold on wages subject to Social Security payroll taxes. Currently, wages above $160,200 are not taxed, and one proposal suggests increasing this threshold to $250,000 or higher to generate additional revenue.
- Raise the Full Retirement Age (FRA): The current FRA is 67 years old for workers born in 1960 or later. By raising the FRA to 69 or 70, lawmakers aim to make more workers ineligible for full Social Security benefits, thereby slowing the trust fund’s depletion.
- Implement Across-the-Board Benefit Cuts: While this idea is politically unpopular, some lawmakers have hinted at the need to reduce Social Security expenditures to achieve budgetary balance, and reducing benefits is one potential approach.
Increase Payroll Taxes: At present, both employees and employers contribute 6.2% of wages in payroll taxes to fund Social Security. By raising this rate, Congress could inject additional funds into the Social Security program.
Is It True That Social Security Benefits Will Be Reduced in 2033?
Yes, it is projected that Social Security benefits may be reduced by 2033. This is primarily due to the depletion of the Social Security Administration’s (SSA) trust fund, which is expected to run out of excess reserves by that year. At that point, the SSA will only be able to pay out a portion of a retiree’s full benefits, with estimates suggesting a payout of about 77% of the full benefits.
The financial strain on Social Security funding is due to a variety of factors. One significant factor is the aging of America’s population, with the Baby Boomer generation retiring at a rapid pace. This demographic shift means there will be fewer workers contributing to Social Security via payroll taxes, while the number of beneficiaries increases.
Additionally, there has been a decline in the U.S. birth rate and an increase in death rates due to the COVID-19 pandemic. Both of these factors contribute to a shrinking workforce, which further strains the Social Security system.
While the situation may seem dire, it’s important to remember that Social Security insolvency does not mean the system will stop paying benefits entirely. Even without the trust fund, Social Security will still collect payroll and self-employment taxes, as well as income taxes from some higher earners.
Social Security COLA Increase for 2024: Will You Get More Cash Next Year?
Social Security benefit payments are going to be positively impacted next year, following the inflation that, for that reason, is being contained with the policies of the Joe Biden administration. As you should know so far, your payments raise every year following the Cost of Living Adjustment (COLA).
This index is expected to increase Social Security payments by 3 percent for 2024. It is certainly less than the 8.7 percent we saw last year, but this is both good and bad news: the fact that the increase is only 3 percent means that payments will grow less than in the previous period, but it also means that inflation will be smaller than the previous one.
