Social Security benefit cuts coming: Here’s the timeline of how we got here and the forecast for when those cuts could happen

For most retired Americans, Social Security is a vital source of income they would struggle to get by without.

An analysis by the Center on Budget and Policy Priorities found that payments from this critically important program would lift about 22.7 million people above the federal poverty line in 2022, including 16.5 million adults age 65 and over. The mere existence of Social Security has reduced old-age poverty rates from about 38.7 percent without the program to 10.2 percent with it.

Meanwhile, more than two decades of annual Gallup polls have shown that 80 percent to 90 percent of retirees surveyed rely on their monthly paycheck to cover at least some of their expenses.

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Ensuring Social Security’s long-term financial health is of utmost importance to current and future generations of retirees. Unfortunately, the latest report on Social Security administrators confirms what has been predicted for decades. Namely, the financial foundation of America’s main retirement program is crumbling, and benefit cuts appear to be on the way.

Let’s take a closer look at how we got to this point and when these projected benefit cuts might occur.

Social Security faces a $23 trillion long-term funding shortfall

Every year since the first retired worker’s check was mailed in January 1940, the Report of the Social Security Administrators has examined the current financial health of this leading program. In addition, trustees consider a host of other factors, including fiscal and monetary policy changes and demographic changes, to make assumptions about short-term (10-year) and long-term (75-year) financial stability.

Since the last major bipartisan overhaul of Social Security in 1983, which introduced benefit taxation and gradually raised both the payroll tax on earned income and the full retirement age, Social Security has consistently brought in more revenue than it paid out through benefits and administrative expenses each year. . This caused the combined program asset reserves for the Old-Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI) to increase from $24.9 billion in 1983 to a peak of $2.908 trillion dollars in 2020.

However, nearly four decades of cash inflows have shifted decisively towards outflows, with the combined asset reserves of OASI and DI declining by $56.3 billion in 2021, $22.1 billion in 2022 and 41.4 billion USD in 2023.

Over the long term, administrators estimate that Social Security is looking at a $23.2 trillion shortfall (and growing) in funding obligations. To be clear, this not means the program is insolvent or facing bankruptcy. However, it means that the current payment schedule, including annual cost-of-living adjustments (COLAs), will not be sustainable for the next 75 years, based on the variables examined. And for what it’s worth, trustees have warned every year since 1985 of a long-term funding shortfall.

However, the more immediate concern of beneficiaries is the estimated date of depletion of OASI’s asset reserves.

Year-End US Old-Age and Survivors Trust Fund Assets by YCharts.

The reduction in Social Security benefits may come sooner than you think

OASI is responsible for providing monthly benefits to more than 51 million retired workers and approximately 5.8 million survivor beneficiaries. Despite the OASI ending in 2023 with $2.641 trillion in asset reserves, administrators have estimated a 2033 depletion date for this excess capital.

I repeat, even if OASI’s asset reserves were to disappear completely, Social Security would not be insolvent or bankrupt. The 12.4% payroll tax on wages, along with the taxation of Social Security benefits, will generate recurring revenue that the program can pay out to eligible beneficiaries.

But based on the current payment schedule, steep benefit cuts of up to 21 percent may be needed to sustain payments to retired workers and surviving beneficiaries in just nine years without the need for further cuts through 2098. Assuming a Average annual COLA of 2.6% through 2033 — 2.6% is the 20-year average COLA — significant benefit cuts of 21% would reduce annual unpaid wages for retired workers by more than $6,000!

What’s to blame for Social Security’s crumbling financial foundation?

Social media message boards are full of some very bad takes that “Congress stole from Social Security” or “undocumented immigrants receiving benefits” are why Social Security is in such bad financial shape. However, both of these long-held claims are patently false.

Social Security’s growing financial situation is primarily the result of five ongoing demographic changes:

1. Baby boomers are retiring: The most important of these changes is the continued retirement of the baby boomers. While boomers played a key role in expanding Social Security’s asset pools in the 1980s, 1990s and 2000s, they now weigh heavily on the worker-beneficiary ratio as they leave the workforce.
2. Increased longevity: Although the average life expectancy in the US (76.3 years, as of 2021) has decreased in the wake of the COVID-19 pandemic, it has increased significantly from the approximately 63 years it was when the first check was sent for retired workers in 1940. the program was never designed to support payments to the elderly for decades.
3. A cut in net migration to the US by more than half: Social Security relies on a steady number of legal immigrants entering the US each year and contributing through payroll taxes. Unfortunately, net legal migration to the US has declined for 25 consecutive years (1998-2023) and is down 58% since 1998.
4. Rising income inequality: In 2024, all income earned between $0.01 and $168,600 is subject to the 12.4% payroll tax, while income above $168,600 is exempt. In 1985, nearly 89 percent of all wages and salaries were subject to the payroll tax. But as of 2021, that figure has dropped to just 81.4% of earned income.
5. A historically low US fertility rate: Finally, the U.S. fertility rate reached an all-time low of 1.62 per woman in 2023. A host of factors have led to fewer children being born, which will be problematic for the worker-to-income ratio in the years to come.

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Yesthere is a fix — but it’s easier said than done

Now that you have a better idea of ​​how America’s most important retirement program got into this mess, let’s address the pressing question: “Can it be fixed?”

The interesting thing about Social Security is that it has been in crisis before. Before the Social Security Amendments of 1983 were signed into law, the program’s asset reserves faced the possibility of being depleted in short order. Lawmakers have a history of waiting until the 11th hour before stepping in to fix one or more issues.

Even as lawmakers recognize clear deficiencies in Social Security, they are tempted to kick the can down the road. The reason is that any remedy will be detrimental to at least one group of current or future beneficiaries.

For example, most Democrats in Congress favor raising payroll taxes on high earners to generate additional revenue for Social Security. Both President Joe Biden and Vice President and presidential nominee Kamala Harris have proposed or supported reintroducing the payroll tax on incomes over $400,000.

Even if this would affect only a small percentage of working Americans, it would still cause high earners to pay more in taxes but receive no additional Social Security benefits, making them worse off than before.

Comparatively, Republican lawmakers want to gradually raise the full retirement age to 70 to reduce long-term spending. While this would have no impact on current and short-term retirees, it would reduce the lifetime benefits collected by future generations of workers.

Neither party wants to be blamed for making one group of Americans worse off than before they changed Social Security — especially during election season.

The other challenge to establishing Social Security is that it will almost certainly require bipartisan support. Because no party has held a supermajority in the Senate since 1979, and 60 votes are needed in the upper house of Congress to amend the Social Security Act, cooperation, not competition, will be needed.

Although these core proposals from Democrats and Republicans come from opposite ends of the political spectrum, combining the two could solve much of what ails Social Security.

For example, raising payroll taxes would immediately address short-term funding shortfalls, which the Republican proposal fails to do. However, the GOP plan would help lower long-term spending, which is sorely missing from the Democratic Party’s plan to strengthen Social Security over the long term.

Social Security can absolutely be strengthened — but a fix is ​​easier said than done. Meanwhile, steep benefit cuts of up to 21 percent remain firmly on the table for retired workers and surviving beneficiaries nine years from now.