The program’s finances aren’t in the best shape, to put it lightly.
Social Security is a critical source of income for millions of older Americans today. Without those benefits, many seniors would struggle to cover their basic expenses.
The good news is that despite rumors, Social Security is not at risk of disappearing. Since the program’s main source of revenue is payroll taxes, Social Security can collect income steadily, thereby allowing it to continue paying benefits.
But in just a few years, those benefits could be reduced once Social Security’s Old-Age and Survivors Insurance (OASI) Trust Fund runs out of money. Cuts may be partially or completely preventable, but lawmakers will need to act quickly.
Why Social Security faces cuts
The reason Social Security is at risk of cuts boils down to a shrinking labor force. A smaller workforce means less payroll tax revenue, straining the system.
Social Security can continue paying benefits once its OASI Trust Fund runs dry. But at that point, incoming payroll tax revenue is expected to cover only 78% of benefits, leaving the door open to a potential 22% cut.
The OASI Trust Fund is expected to run out of money by the last quarter of 2032. If Congress votes to combine the OASI Trust Fund with Social Security’s Disability Insurance Trust Fund, benefits will be 100% payable through the third quarter of 2034.
But combining the two funds isn’t enough to completely solve the problem of benefit cuts. Congress will need to implement serious reforms to keep Social Security benefits payable in full.
Options for preventing Social Security cuts
Even though lawmakers have options for keeping Social Security afloat, they’re not simple ones. Congress could raise the payroll tax rate, which is currently 12.4%, so that workers and employers pay more into Social Security. But higher taxes won’t be an easy thing to absorb.
Congress could also raise or eliminate Social Security’s wage cap, which limits the amount of income subject to Social Security taxes each year. That change won’t impact low or moderate earners, but it impacts corporations as it does higher earners. And it could lead to corporate spending cuts elsewhere.
There’s also the potential to raise full retirement age for Social Security, which is currently 67 for anyone born in 1960 or later. Doing so could keep workers in the labor force longer, thereby boosting revenue. But it might also force some workers to accept a self-imposed benefit cut because they cannot work past 67.
All told, there’s no easy way to prevent Social Security cuts. But given what’s on the line, lawmakers will need to act quickly to stave off a broad financial catastrophe.
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