190 million Americans don’t know Social Security cuts could be coming — and the size may surprise retirees

Social Security is an essential part of American life. The program pays a regular, monthly income to millions of American retirees — more than 70 million last year. For many, it provides a significant supplement to personal savings and a measure of safety. For others, it’s almost all they have. In fact, for the bottom 40% of earners, Social Security accounts for 84% of their post-retirement income. What would these Americans do without Social Security?

Despite the critical role it plays in our society, Social Security has a history of being on somewhat shaky financial ground at times. Sweeping changes in the 1980s and 1990s — including increased taxes on Social Security benefits — put the program in a position to remain solvent.

The declining birthrate is putting a massive strain on Social Security, and huge cuts could be coming

The program works because young, healthy workers pay for it, while those enjoying their golden years benefit from it. As long as the balance between workers and retirees is maintained, the program is solvent. The ratio of workers to retirees is affected by many things, such as immigration and (to a lesser extent) increased life expectancy, but the biggest factor is the national birth rate, which has been falling for years. With fewer healthy, productive workers relative to retirees than there once were, less is being paid into Social Security than is being paid.

The Social Security Administration estimates that the coffers will be empty by the end of 2033. At that point, it will only be able to pay what it brings in. What does this mean in real numbers? An across-the-board reduction of 25%, that works out to just under $17,000 per couple in 2034. For context, if a 25% reduction happened today, the average couple would lose about $11,500 per year.

This would have a massive effect on the lives of most beneficiaries. For the 40% who rely on Social Security for the lion’s share of their income, it could be catastrophic. Here’s the thing: Only 30% of Americans even know this could happen. In other words, 190 million American adults have no idea. But don’t panic – there’s still time to act.

If Congress wants to avoid destroying Social Security, it must act. Here’s what it might look like

The truth is, getting Congress to not just act, but to agree on how to act, is an uphill battle. Perhaps this is no surprise to anyone — after all, Congress’s approval rating is near an all-time low. But hope springs eternal, right? Something must be done.

The main strategies proposed to fix Social Security can be boiled down to two main paths: raising revenues — that is, raising taxes — or cutting costs — that is, cutting benefits. But what exactly do these measures look like? Do we do a combination of the two?

Let’s look at some of the most popular proposals. The easiest way to compare apples to apples here is to consider how each will affect the long-term budget deficit as a percentage of total taxable wages. The SSA projects a long-term deficit of 3.5%. Any combination of measures must add up to at least 3.5%.

A recent plan by an influential group of MPs proposes “modest adjustments to the retirement age”. The plan doesn’t specify the exact age, but let’s say we raised the early retirement age and the normal retirement age by 2 years to 64 and 69, respectively — note that this would happen gradually over time until the ages reach the new levels in 2031. This would represent approximately 0.9 percentage points of the deficit.

Another popular proposal on the other side of the aisle is to raise the Social Security tax cap or eliminate it entirely. Currently, wages above $168,600 are not taxed. If we were to eliminate the cap entirely while raising benefits to match — as it stands, wages above the cap may not be taxed but don’t earn you benefits — we’d get another 2 percentage points.

There are certainly other proposals, but I hope this illustrates that the problem would not be solved by a single approach. It will take a bipartisan effort that could combine both revenue-raising measures and cost-cutting measures. Whatever the details, something needs to be done before 2033. Still, it would seem like a good idea to get the ball rolling now, given how long it might take to reach a consensus.

I trust that action will be taken, but remember that Social Security was never intended to be the primary source of income for retirees. It was designed to be part of a multi-faceted approach that included pensions and personal savings. Obviously, pensions aren’t as common anymore for non-public employees, but the point remains: focus on what you can control as best you can. Smart and disciplined investing early in life can lead to a peaceful and secure retirement.