The future financial situation of Social Security. In talks of Social Security, the terms “solvency,” “sustainable,” and “budget effect” are frequently used but poorly understood. Today, the Social Security Board of Trustees anticipates that program costs will increase by 2035, resulting in taxes covering only 75% of planned payments.
All kinds of anxiety were sparked by the pandemic-related economic shutdown in 2020, oddly enough, the fear that people who turn 62 next year would have their Social Security benefits drastically cut. (Image courtesy of https://www.freep.com/)
Not because we are living longer, but rather because birth rates decreased from three to two children per woman, population aging is the cause of this increase in expense. It’s important to note that this financial situation or shortfall is essentially stable after 2035; changes to taxes or benefits that counteract the impacts of the reduced birth rate may restore Social Security program viability on a sustained basis for the foreseeable future.
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Lastly, as future redemptions of Treasury debt instruments (assets held in trust funds) occur, they will simply be replaced by new public debt. Benefits must be reduced if trust fund assets run out without reform, but budget deficits won’t be affected.
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Due to modifications to Social Security adopted in 1983, benefits are now anticipated to be paid in whole and on schedule until 2037, when it is anticipated that the trust fund reserves will run out.
After the reserves are exhausted, it is anticipated that ongoing taxes will be sufficient to cover 76% of the planned benefits. As a result, the Congress will eventually need to alter the program’s planned benefits and sources of funding.
Even though that possibility is terrifying, the alternative may be even worse: It is possible to interpret a little-known provision of a 1996 law to allow the Social Security trust fund to be used for more than just paying Social Security’s monthly checks; it could also be used to get around the debt limit and pay all of the government’s bills that would otherwise be past due. Getty Images (photo)
According to the Social Security Board of Trustees, immediate adjustments equal to a 13 percent reduction in benefits, a 14.4 percent increase in the combined payroll tax rate, or some combination of these adjustments would be necessary to enable full payment of the scheduled benefits for the ensuing 75 years.
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The progressive raising of the retirement age is another reform that would significantly reduce the Social Security deficit. This would reflect an extension of the modifications made by Congress in 1983, the last time the finances of Social Security were altered. Think about what would happen if the age of early retirement, which is currently 62, and full retirement, which is currently 67, were both raised by three months per year for the following eight years, until they were, respectively, 64 and 69.
Financial advisors have compared America’s retirement system to a “three-legged stool” for decades: that having a healthy pension from work, a lot of personal savings, and a monthly payment from Social Security is the equation for late-life security. (Photograph by https://www.aarp.org/)
According to this new app, those adjustments would reduce an extra 25% of the actuarial financial situation or shortfall. These two reforms would erase 69% of the Social Security financial situation or shortfall between now and 2098, along with the progressive increase in the Social Security tax.
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One could contend that raising the retirement age complies with Social Security’s founding legislation’s spirit rather than its letter, which was established in 1935. That’s because, according to the American Academy of Actuaries, life expectancy in the United States has climbed by more than six years since then. Hence, Social Security is being expected to cover more years of retirement than it was intended to.
