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The Congressional Budget Office projects that the Social Security trust funds would no longer have the financing to be able to pay full benefits to recipients by 2033 without adjustments to the program, according to the office's report released in December.
The report shows that if the program continues to pay benefits as scheduled under the current law then the gap between the trust funds' payments and income would reach zero in 2033, leaving it without sufficient balance to cover scheduled payments.
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The CBO projections show spending on Social Security growing from 5.0% of GDP in 2022 to 7.0% in 2096 if benefits continue to be paid as scheduled, while revenues would stay at approximately 4.6% of GDP. In this case, Social Security's Old-Age and Survivors Insurance Trust Fund, which provides benefits to retired workers, their eligible dependents and some survivors of deceased workers, would be exhausted by 2033, and the Disability Insurance Trust Fund, which provides benefits to disabled workers and their dependents, would be depleted by 2048, according to the CBO. Combining the trust funds would mean an exhaustion date in 2033.
Following that scenario, if the trust funds are exhausted in 2033, benefits to Social Security recipients would be approximately 23% lower in 2034 than the scheduled benefits. The gap would grow and reach 35% by 2096, according to the CBO.
The cause for the challenge is that spending for Social Security is set to increase sharply in relation to GDP in the next decade as the large baby-boom generation retires, according to the CBO. As the baby boomers die, the growth will slow but spending will keep rising throughout the CBO's 75-year projection period because life expectancy is expected to rise.
Meanwhile, Social Security revenues will remain stable compared to GDP, the CBO report indicates. Although receipts from income taxes on Social Security benefits will see slight growth, payroll tax revenues will decrease slightly, offsetting each other and keeping revenues "roughly unchanged as a percentage of GDP," the CBO said in its report.
The CBO estimates that Social Security's actuarial deficit over the next 75 years is the equivalent of 1.7% of GDP. Based on that calculation, the federal government could maintain the necessary trust fund balances through 2096 by immediately and permanently raising payroll tax rates by about 4.9 percentage points, according to the CBO. The government also could ensure there are sufficient funds through that year by reducing benefits by an equivalent amount or employing a combination of tax increases and benefit reductions.
Related: Social Security: The last unexplored frontier?
Payroll taxes provide the bulk of financing for Social Security. Employers and employees each pay 6.2% of earnings up to the taxable maximum of $147,000 (in 2022), while the self-employed pay 12.4%. In 2022, payroll taxes accounted for approximately 90% of Social Security income. The remaining 10% came from interest earnings and revenue from taxation of earnings, according to the Social Security Administration.
Plans to strengthen Social Security program
While campaigning in 2020, President Joe Biden presented a four-point plan to strengthen the Social Security program, as reported by Motley Fool. The plan relies on increasing payroll taxation on high earners, increasing the special minimum benefit to 125% of federal poverty level, boosting the primary insurance amount for aged beneficiaries to account for higher late-in-life expenditures, and changing Social Security's measure of inflation from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E) to more accurately track cost-of-living expenditures for the seniors leaning on Social Security.
Republicans have an opposing plan that features gradually increasing the full retirement age and using the Chained Consumer Price Index for tracking inflation, according to Motley Fool. With Republicans controlling the House of Representatives and the Democrats controlling the Senate, which would require 60 votes to pass a new bill, new legislation seems unlikely in the near future.
The report and uncertain future of attempted solutions to Social Security's funding challenges provides financial advisors and employers with a crucial consideration as they help workers develop their portfolios and plan for retirement.
