Social Security is facing a potential financial crisis that could impact millions of Americans who rely on these benefits for their retirement income. According to recent reports, the Social Security trust funds are projected to be depleted by 2034, which could significantly reduce retiree benefits. The Congressional Budget Office (CBO) released a report in September that estimated the Social Security program would reach insolvency in 2034.
However, recent events suggest that the program could face potential benefit cuts even sooner than that. One of the main reasons for Social Security’s financial troubles is the demographic shift that began when baby boomers started retiring. This generation is more extensive than most others. While their participation in the workforce was beneficial for the system when they paid Social Security payroll taxes, their retirement has increased program expenses steeply, with fewer workers left to contribute.
Social Security has two other funding sources besides payroll taxes: benefit taxes on some seniors and interest income earned on money in the program’s trust funds. However, both of these sources are currently in danger. The program’s total costs surpassed its income in 2021, and its costs have been higher than the trust funds’ non-interest income since 2010.
This means that the program is currently sustaining itself by slowly draining its trust funds, which won’t be possible forever.
Potential Social Security benefit reductions
The CBO report estimated that the trust funds would be depleted in 2034, but it could happen sooner.
A recent policy change increased Social Security benefits for 2.8 million government workers, accelerating the trust fund depletion date by about six months. If additional measures, such as reducing payroll taxes, are implemented, the problem could worsen. This would leave the program with fewer resources, potentially leading to more drastic benefit cuts for seniors. While the government’s ultimate decision on how to address the Social Security shortfall is uncertain, it is clear that the program will continue in some form well beyond 2034.
According to the CBO report, the program could still pay out about 77% of scheduled benefits in 2035 even if no changes are made. With some modifications, benefits might not need to be reduced as significantly. Given the uncertainty surrounding Social Security’s future, individuals must focus on what they can control now.
Saving as much as possible for retirement independently will reduce reliance on Social Security and better prepare individuals for whatever happens with the program. Some potential strategies to prepare for the Social Security crisis include consulting a financial advisor to understand the possible impact on benefits. You can also consider applying for benefits early to secure a more extensive check before the crisis occurs.
Your Social Security payment should be as much as possible within your means. You should also diligently save and develop passive income streams to help mitigate the impact of reduced benefits. While we wait for lawmakers to design and implement a rescue plan that keeps Social Security on course, it’s essential to have a personal plan in place just in case.
Talking to a financial adviser about running a Social Security “stress test,” seriously considering your claiming options, reviewing your retirement income streams, and potentially rethinking your plans are all steps that could help you prepare for potential changes to the program.
