Social Security Has a Funding Problem, but Benefit Cuts Aren’t the Only Solution

If you’re a retiree who receives Social Security and are worried about benefit cuts, you’re in good company. There’s been talk of benefit cuts for years. And the program’s Trustees even said last year that benefits may need to be cut in 2033 once the Social Security trust fund that helps cover those payments runs out of money.

Of course, benefit cuts aren’t just a problem for current retirees. They’re an issue for workers who hope to retire comfortably, too.

The good news is that Social Security cuts aren’t inevitable. Lawmakers have numerous options for preventing those cuts. The problem is that the alternatives all seem to come with serious drawbacks.

Why Social Security is facing a shortfall

Social Security’s main source of revenue is payroll taxes. In the coming years, that revenue stream is expected to shrink due to a mass retirement among baby boomers.

Now there will be workers coming into the labor force to replace retiring boomers. But the rate of replacement workers is expected to fall short, leaving Social Security with inadequate revenue to keep up with its financial obligations in full.

Social Security can tap its Old-Age and Survivors Insurance (OASI) Trust Fund to pay retirement benefits. But the program’s Trustees say that fund will be out of money in 2033. And more recently, the Congressional Budget Office said the OASI Trust Fund could be depleted in 2032 — one full year sooner. Once that happens, benefit cuts are a possibility.

Cuts aren’t the only option

While workers and retirees may have to brace for Social Security cuts, slashing benefits isn’t a given. There are other options on the table, but unfortunately, they all seem to have negative consequences.

Here are some alternatives:

• Raise full retirement age and force workers to wait longer to get their benefits. It could pump more money into Social Security, but the downside is that millions will effectively be sentenced to a delayed retirement or face reduced benefits from filing early.
• Raise the payroll tax rate. It’s currently 12.4%, split evenly between employers and employees. Higher taxes pump more revenue into Social Security but burden workers across all income levels and the businesses that pay their wages.
• Raise or lift the wage cap. Workers don’t pay Social Security taxes on more than $184,500 of income this year. Raising or eliminating that cap gives Social Security more money. But it could burden wage-earners in high-cost areas. It also creates issues if Social Security doesn’t raise its maximum benefit to account for higher contributions.
• Means test retirees. Currently, anyone who paid into Social Security can get retirement benefits. Means testing would reduce or remove those benefits for high-income seniors. This changes the nature of Social Security, shifting it from an entitlement program to more of a welfare program.

It’s best to prepare for cuts either way

Social Security cuts are not guaranteed to happen. But because the options that exist to prevent them all have pitfalls, it’s a good idea to brace for potential cuts.

For current retirees, that means rethinking spending and exploring cost-saving measures like relocation. For workers, it means saving and investing wisely to become less reliant on Social Security once retirement rolls around.