As we enter the final stretch of the 2024 presidential election, it’s clear that Social Security has once again become a focal point. Both political parties are taking swings at each other over a familiar issue: the health of the Social Security trust fund. Instead of diving into the rhetoric, let’s look at the actual numbers and the state of the trust fund.
Understanding the Social Security Trust Fund
To start, the Social Security "trust fund" isn’t just one fund but two: the Old-Age and Survivors Insurance (OASI) trust fund, which was established in 1937 to fund retirement benefits, and the Disability Insurance (DI) trust fund, created in 1957 to pay out disability benefits. These two funds, by law, cannot mix their assets.
The combined reserves of these trust funds peaked at $2.9 trillion in 2020 but are expected to decline steadily until 2035. This isn’t just speculation—each year, the Social Security Trustees issue a report with updated projections. According to their 2024 report, unless action is taken, the combined trust fund could become insolvent by 2035.
Why Is This Happening?
There are two main reasons for the strain on Social Security. First, birth rates have declined over the past several decades, while life expectancy has increased. This means there are fewer workers supporting more retirees. For perspective, in 1965 there were four workers for every Social Security beneficiary. In 2024, that number has dropped to just 2.7 workers.
The second reason is that addressing Social Security’s solvency hasn’t been a priority for Congress. Understandably, it’s easier to focus on immediate issues like recessions, wars, or government shutdowns than on a problem that’s projected to surface a decade from now. For example, back in 2000, the Social Security Trustees predicted the trust fund would be exhausted by 2037. By 2010, the projection was still 2037. Congress has consistently opted to defer addressing the issue, likely waiting until a crisis point.
What Happens When the Trust Fund Is Exhausted?
One of the biggest misconceptions about Social Security is that when the trust fund runs out, benefits will stop altogether. Fortunately, that’s not the case. Once the trust fund is depleted, Social Security will continue to bring in revenue from payroll taxes. However, the revenue won’t be enough to cover full benefits. Based on the 2024 Trustees’ report, beneficiaries would see a 21% reduction in their monthly benefits if no changes are made.
For example, if a retiree currently receives $2,000 per month, that amount would drop to $1,580 per month. While not ideal, it’s important to note that Social Security won’t vanish—it just may be less generous without adjustments.
What Could Congress Do?
If history is any guide, Congress will likely make changes before the trust fund is exhausted. The last time Social Security faced insolvency, in 1983, Congress passed several amendments. These included delaying the Cost-of-Living Adjustments (COLA), increasing the portion of Social Security benefits subject to taxes, and raising the Full Retirement Age (FRA) from 65 to 67.
Here are some potential options that have been discussed in recent years to address the shortfall:
- Raising the Full Retirement Age from 67 to 70
- Increasing the taxable portion of Social Security benefits from 85% to 100%
- Lifting the cap on taxable wages (currently capped at $168,600 in 2024) or taxing all earned income for Social Security, similar to Medicare
- Increasing the payroll tax rate from 6.2% to 7.75%
- Reducing benefits for high-income earners
- Cutting back on the annual Cost-of-Living Adjustment
What Can You Do?
While it’s impossible to predict exactly what Congress will do, it’s clear that Social Security will continue to be a topic of debate for years to come. In the meantime, it’s crucial to plan for the possibility of reduced benefits in the future.
If you haven’t already reviewed your retirement plan, now might be a good time. Whether it’s determining how much you’ll rely on Social Security or exploring alternative income sources, a proactive approach can help you feel more secure. If you have questions or want to talk through strategies to protect your retirement income, feel free to reach out.
Social Security may face challenges, but with the right planning, you can still feel confident about your financial future.
Mark Rosinski, CFP®, CPA
Wealth Advisor
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