SHORING UP SOCIAL SECURITY
Kiplinger's Personal Finance|March 2021
Social Security is headed for a shortfall. But sooner or later, lawmakers will act to preserve your benefits.
LISA GERSTNER

For years, policymakers—and future beneficiaries—have been wringing their hands over the prospects for Social Security. And make no mistake: The program is headed for trouble.

According to projections that the Social Security Board of Trustees released last April, starting in 2021 the program’s annual costs will exceed its income from employee and employer payroll taxes and interest earnings. Once the program turns that corner, Social Security will begin drawing down assets in its trust funds to continue providing full benefits. Largely driving the shortfall is a decreased birth rate since the baby boom generation, creating a higher ratio of retirees to workers paying into the program.

Social Security’s trust funds are on course for depletion in 2034, according to estimates the trustees issued in November to gauge the effects of the coronavirus crisis. That’s a year earlier than the 2035 depletion date the trustees had predicted in a report issued in April. Job losses, reduced hours and slowed wage growth diminish the amount of payroll tax revenues coming into the program.

The stakes are high. Overall, Social Security benefits represent about 33% of income among those 65 and older, according to the Social Security Administration. Half of married couples and 70% of single people rely on Social Security benefits for 50% or more of their income. And 21% of married couples and about 45% of unmarried people receive at least 90% of their income from Social Security.

After the trust funds run dry, Social Security could pay out about 75% to 80% of promised benefits with incoming payroll taxes. For many of those who expect to be in or near retirement by the mid 2030s, the prospect of a smaller Social Security check is alarming.

But lawmakers are almost certain to buttress the system before that happens. An extended benefits cut is “unthinkable for so many older Americans who rely on the program,” says Shai Akabas, director of economic policy for the Bipartisan Policy Center, a Washington, D.C., think tank. In all likelihood, any changes to the program will preserve full benefits for retirees who are already receiving them or will soon start collecting them. Younger generations, however, may not receive the same level of benefits provided to current retirees.

When Will Reform Happen?

The sooner Congress acts to shore up Social Security, the more time it will have to spread out tax increases or benefit changes, potentially easing the burden on younger generations who will shoulder most of the load. “This is a problem that policymakers have known about for decades, but it has been much easier to kick the can down the road than to make difficult and generally unpopular decisions,” says Shai Akabas, director of economic policy for the Bipartisan Policy Center. The last time Congress passed major Social Security reforms, in 1983, the program’s trust funds were just three months from running out of money.

Plus, the government has more-pressing issues at hand as it grapples with the effects of the coronavirus pandemic. And the trust fund that pays for Medicare Part A will run dry in 2024—much sooner than Social Security’s expected depletion date of 2034—according to predictions from the Congressional Budget Office. “I don’t foresee Social Security being a top issue on the agenda for the incoming presidential administration,” says Akabas.

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