The Retirement Crisis: Social Security’s Dwindling Funds Threaten Benefits

America’s aging population faces a grim reality as Social Security trust funds teeter on the brink of depletion. 

Fund reserves for Social Security and Medicare will be exhausted by 2034, posing challenges to maintaining benefits for current and future beneficiaries. 

The situation presents a dire financial crisis for millions of retirees, as cuts to payments are inevitable without significant legislative changes in the coming decade. 

Widening Gaps

The Social Security Administration’s (SSA) 2023 Trustees Report reveals a disturbing trend. The Old Age and Survivors Insurance Trust Fund (OASI) can sustain full benefits until 2033. At that time, the fund will deplete its reserves, and anticipated revenue will only cover 77 percent of the program’s scheduled benefits going forward.

Compounding the issue is the rapidly increasing number of beneficiaries due to retiring baby boomers, coupled with consistently lower birth rates since that era, leading to slower employment and GDP growth. Consequently, the projected annual cost for the OASI fund is swelling while income rates remain stable, resulting in a growing deficit. This imbalance threatens the sustainability of a program supporting 20% of the U.S. population.

Under the rules governing the OASI fund, once it reaches insolvency, expenditures are limited to the level of incoming revenue. This restriction will result in a 23 percent reduction in benefits across the board, affecting all 70 million individuals enrolled in the program. The cuts will impact retirees, dependents, and survivors regardless of their financial situations or needs, including the 22 million people the system lifts out of poverty. 

The Committee for a Responsible Federal Budget (CRFB) estimates that for a typical newly retired dual-income couple, these cuts will translate into a $17,400 annual reduction in benefits. In contrast, a single-income couple will immediately lose $13,100. Reduced benefits could put many into financial distress, as the impending cuts disproportionately affect low-income retirees. 

Government Intervention 

The growing deficit exerts unprecedented pressure on the economy and underscores an urgent need for change. In response, lawmakers are proposing multiple reforms. 

The Medicare and Social Security Fair Share Act aims to extend Social Security solvency indefinitely. The act requires high-income taxpayers to contribute more, ensuring the wealthiest two percent, earning more than $400,000 annually, pay their fair share. Estimates suggest that this measure would preserve these programs and extend Medicare solvency by 20 years.  Congressman Brenden F. Boyle noting that “this legislation saves Social Security and Medicare for generations to come.” 

Meanwhile, the Social Security Expansion Act, introduced by Senators Elizabeth Warren and Bernie Sanders, proposes increasing Social Security benefits by $2,400 annually. The bill plans to fund this increase by imposing a 12.4% tax on investment income for high earners and extending the payroll tax to wages above $250,000. This legislation projects to keep Social Security solvent for the next 75 years. 

In addition to maintaining the programs, these initiatives aim to address broader societal issues. The Social Security Expansion Act intends to help low-income workers avoid poverty. They aim to reinstate student benefits for children of disabled or deceased workers and enhance assistance for elderly individuals and those with disabilities.

However, as commendable as these proposals are, their broader fiscal impact is a crucial consideration. While both acts extend the solvency of Social Security, increased taxes on payrolls and capital gains would likely reduce taxable income for other government sectors, potentially increasing overall budget deficits outside of Social Security.

Alternative Options

The complex dilemma with competing interests, both societal and political, coupled with economic unknowns, presents a difficult challenge. 

The CRFB has attempted a reform plan that aims beyond simply assuring actuarial soundness. To improve both retirement security and economic growth, the CRFB believes Social Security changes must increase national income by promoting work, investment, and fiscal sustainability.

The committee encourages later retirement and productive aging in its Pro-Growth Social Security Reform framework. Its measures include raising the Social Security retirement age while introducing a Poverty Protection Benefit to increase support for low-income workers.

The committee proposes incentivizing continuous work engagement by basing benefits on annual earnings instead of the traditional 35-year average. This change could motivate sustained workforce participation across all ages.

The framework suggests auto-enrolling workers in Supplemental Retirement Accounts to foster increased savings and investment. Unless a worker opts out, these accounts would receive a portion of wages in addition to the standard payroll tax. 

These recommendations aim to enhance both long-term certainty and sustainability in the Social Security system. 

Time for Action

The SSA’s Trustees Report sends a clear message. Immediate and decisive action is necessary to avert a crisis that could leave millions vulnerable. If unaddressed, Social Security insolvency will have far-reaching social and economic consequences.

This scenario could drastically increase poverty rates among seniors who rely on Social Security for a significant portion of their income. Flow-on effects would likely strain other social safety net programs and healthcare systems. 

Additionally, the pressure on younger generations to support older family members would likely intensify. This burden could impact their financial stability and contribute to more expansive fiscal repercussions such as lower consumer spending, potentially slowing broader economic growth. 

As trust fund reserves continue to decline, the need for legislative intervention to safeguard these essential programs becomes increasingly critical.

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Mark Garro is an Aussie former CPA and corporate finance manager turned research writer. After more than two decades simplifying complex analyses for leading companies, including Goldman Sachs, Marks & Spencer, and Tabcorp, he packed up and moved to the Italian Riviera. Now he covers all things related to finance and equity research for a diverse range of publishers and syndicators around the world.