The future's not looking too bright for Social Security, with the latest projections suggesting that the program will no longer be able to pay all scheduled benefits beginning in 2033. The way things currently stand, checks could shrink by 20% as soon as 2034. That's a huge problem for the millions of seniors who depend on their checks to cover their living expenses and the workers who hope to get something back after paying into the program for decades.
Congress recognizes that this is a serious issue in need of solving. While nothing's been decided yet, politicians have proposed a number of possible solutions to remedy the problem. But they could create new financial challenges that are just as difficult to overcome. Here's what you need to know.
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Social Security COLAs could be at risk
The most devastating proposal for seniors already relying upon Social Security is reducing the program's annual cost-of-living adjustments (COLAs). These are supposed to help benefits keep pace with inflation over time, though many argue they don't do this very well. Benefit checks have lost 40% of their buying power since 2000, according to the Senior Citizens League, and cuts could exacerbate this issue.
The Social Security Administration estimates that reducing the annual COLA by 0.5% could eliminate about 29% of the program's funding shortfall while slashing it by 1% would eliminate about 56% of the shortfall. But this isn't a very popular solution as many seniors are already struggling to get by with the checks they have now. Several politicians have called for an increase to Social Security benefits, and they'd be unlikely to agree to slashing benefits even further.
Other proposals could hurt workers
Many more proposed solutions to Social Security's funding crisis could make life tougher for workers. Some of the many proposals include:
- Raising the age at which you become eligible for Social Security benefits: This is currently 62, but some proposals involve raising this as high as 65 for new beneficiaries or increasing it by one month every two years.
- Raising the full retirement age (FRA): This is the age at which you become eligible for your full Social Security benefit based on your work history. Claiming under this age is possible, but you'll get smaller checks as a result. FRA is currently 66 to 67, depending on your birth year, but it could rise as high as 70, depending on what Congress decides. It could also increase by one month every two years, similar to the earliest eligibility age.
- Changing the way the government calculates your primary insurance amount (PIA): Your PIA is the benefit you're entitled to if you claim at your FRA. The government determines this by plugging data about your income into the Social Security benefit formula. Proposed changes to the formula to adjust for inflation or the increased longevity of workers could reduce the size of the checks new beneficiaries are eligible for.
- Increasing the Social Security payroll tax rate: This is currently 12.4%, split evenly between employee and employer, on the first $160,200 you earn in 2023. Some proposals call for increasing the tax rate for everyone, while other proposals, like Joe Biden's four-point plan, only call for raising the tax rate on the wealthy.
The first three solutions could potentially reduce the lifetime benefit that today's workers receive from the program. This would force them to cover even more of their retirement costs on their own. That's a tall order for those who are already struggling to set aside money for their future.
Raising the Social Security payroll tax could increase the program's funding without reducing the benefits that seniors receive. But it means you could lose more of your paychecks each year to the government. That would not only make it more difficult to pay your bills today, but it could leave people with even less cash to set aside for retirement.
What you can do
Any one of the above proposals on its own probably isn't going to be enough to resolve Social Security's funding shortfall. So the final solution the government implements will likely involve a few strategies. But as the proposals above demonstrate, Congress has a lot to consider before making its decision.
It could be years before the government agrees on a plan to fix Social Security, and all we can really do until then is wait and take steps to secure our own financial future. The less we can rely upon Social Security, the better off we'll be no matter what the government decides.
The easiest way to do that is to prioritize retirement savings as much as you're able to right now. Stash your extra cash in a 401(k), IRA, or other retirement account where it can grow for your future. Take advantage of any 401(k) match that you're eligible for and try to increase your contribution rate every time you receive a raise.
When that's not enough, you may have to rethink your retirement timeline. Delaying retirement gives you additional time to save while reducing how much money you need to cover your living expenses. You could also transition to retirement slowly, dropping to part-time work for a while before retiring for good.
Come up with a tentative plan for now if you don't already have one. But be ready to adapt your approach as necessary if the government does make changes to Social Security.
