Social Security forecasts got a bit muddled last week, with plan administrators predicting the crucial pension plan will run out of money a year earlier than last year.
But if the headlines in the Social Security trustees’ annual report confused you, take a deep breath.
A report released on March 31 predicted that the Social Security pension fund would run out of reserves by 2033. A separate report showed that Medicare’s financial situation improved slightly last year.
But Social Security ended up with $2.7 trillion in reserves in 2022 and could pay full benefits for another 10 years, the report said. Nevertheless, the plan is on track for massive linear benefit cuts by 2033 if no action is taken by the US Congress.
What does the new Social Security forecast mean for current and future retirees? Here are the key questions to consider.
Q: What is “exhaustion” in the context of Social Security?
A: Social Security is funded on a pay-as-you-go basis. Benefits are primarily funded by the Federal Insurance Contributions Act (FICA) tax, which collects 12.4% of wages, split equally between employees and employers. But when Social Security has surpluses, as has been the case in recent decades, the trust fund can also acquire balances. However, as the baby boomer retirement wave accelerates, expenses now exceed income. Another factor is the low fertility rate in the US, which results in fewer workers contributing to the system. Income inequality also plays a role.
The expected expiration date varies from year to year as the trustees reassess economic conditions affecting the plan. The downward revision this year was due to lower labor productivity and economic growth.
Q: You said income inequality contributes to the problem. How did that happen?
A: Social Security only collects FICA contributions up to a certain wage level — $160,200 this year. In recent years, the biggest wage increases have been above that level, so a smaller portion of the U.S. wage base is taxed. The trustee’s report predicts that this trend will continue for the next 75 years. Social security costs are significant. According to an analysis by the Economic Policy Institute, every 1 percentage point decrease in the share of total income subject to FICA reduces income by $12.6 billion.https://bit.ly/3U1jC7q).
Q: What happens if the trust runs out of funds?
A: At that time, the current revenue will be sufficient to pay 77% of the promised benefits, the report says. In other words, benefits would be immediately cut by 23% — not just for current retirees, but for workers who retire later.
Q: Can Social Security tap other sources of government revenue?
A: Not under current law. The project is to be financed only from the trust funds and cannot be borrowed. That means Congress must pass legislation that increases income, reduces benefits, or both.
Q: What if we don’t work with Congress?
A: The closer we get to 2033, the less likely it is to reduce benefits. Benefit cuts are usually introduced slowly to future beneficiaries, so the effect of any cuts may not be sufficient to achieve a settlement. “We’ve delayed it long enough because there are no credible benefit cuts that could prevent the trust fund from drying up in 2030,” said Andrew G. Biggs said.
In a crisis in 2033, an emergency injection of new revenue would likely be possible, says Paul N., a senior fellow at the Center on Budget and Policy Priorities. Van de Water. “Congress would allow program deficits to continue by amending the law to provide additional revenue to Social Security — in effect, funding the program through borrowing.”
That solution would prevent a sharp cut in benefits, but would further fuel public concern about Social Security. A 2020 AARP poll found that 57% of respondents lack confidence in the future of Social Security.
Q: So what are the alternatives?
A: Democrats generally favor funding Social Security by imposing new taxes on the wealthy. Republican positions differ. The populist wing of the party has taken a “get out of Social Security” approach, but has not made clear how they will approach the 2033 debt forecast; Conservatives in the House of Representatives have called for significant cuts in benefits for all but the lowest-income workers, a gradual increase in the full retirement age (when you receive 100% of earned benefits) to 70, and changes to the benefit formula that would sharply cut benefits for middle-income and wealthier workers.
There is no consensus among legislators — but the public has a clear position. An AARP poll shows majorities of Democrats, Republicans and independents agree that “it’s better to pay more for Social Security now to protect benefits for future generations.” A Quinnipiac University poll released last week found 78% of Americans oppose raising the Social Security retirement age from 67 to 70.
“If Congress does what the American people want, they can get it done tomorrow,” said Nancy Altman, associate director of Social Security Services, a progressive advocacy group.
The views expressed here are those of the author, a Reuters columnist.
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