Welcome to our “Social Security Q&A” series. You ask a question about Social Security, and a guest expert answers it.
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Today’s question comes from Debbie:
“I saw the following sentence on my Social Security statement:
‘Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2035, the payroll taxes collected will be enough to pay only about 80 percent of scheduled benefits.’
What does this mean?”
A look at the future of Social Security
Debbie: This is an overly cautious warning from Social Security. It says: “Congress has made changes to the law in the past and can do so at any time.” It might well have said that “Congress has always made changes in the past to ensure that people get their promised benefits.”
Social Security has sometimes been called the ‘third rail” of American politics. While other programs have suffered setbacks, the political support for Social Security has always been very strong.
On the other hand, the program does face serious financial challenges. For many years, Social Security collected more money than it paid out in benefits. This was done intentionally because it was clear long ago that baby boomers are a large cohort and would place greater demands on the system when they reached retirement age.
We are there now, and the Social Security system is now paying out more in benefits than it is collecting in taxes. The projection is that the reserves, which have been built up over the years, will be exhausted in 2035. Note that this is the year that the above statement projects that benefits may be reduced to 80% of their scheduled level.
For a discussion of why these funds may run out before 2035 if Congress does not act, read “Will Social Security Benefits Be There for You?”
To bring the system back into balance, there are basically two approaches: raise taxes or cut benefits. Other options — like investing the reserve funds in the stock market and/or borrowing to raise sufficient funds to pay benefits — have been suggested, but these have their own problems.
Because neither raising taxes nor cutting benefits is politically attractive, Congress has been unwilling to confront the problem until now, but the time for action is quickly approaching.
There are many possible approaches to solving these problems; each approach will have a different effect on various political constituencies. For example, President Joe Biden has proposed raising taxes, but only on people earning $400,000 or more.
Others have proposed raising the full retirement age, which effectively would reduce benefits for younger people but have no effect on older beneficiaries.
A particularly well-formulated approach to these concerns has been done by the Bipartisan Policy Center.
One thing is clear. The longer Congress waits, the more difficult the problem will be to solve, because any adjustments will have to be larger. For example, if we wait, an increase in the full retirement age will have to be bigger to have the same financial impact.
Less clear is who will be hurt by the changes, as this is a political decision. If I were to make a prediction, more of the burden of any changes will fall on younger people. The benefits they receive from the program will be less generous than the benefits retirees now receive.
On the other hand, many young people do not believe the program will be there for them. I would be incredibly surprised if that were the case. After all, Social Security is the “third rail” of our political system.
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I hold a doctorate in economics from the University of Pennsylvania and taught economics at the University of Delaware for many years. Presently, I am teaching at Gallaudet University.
Disclaimer: We strive to provide accurate information with regard to the subject matter covered. It is offered with the understanding that we are not offering legal, accounting, investment or other professional advice or services, and that the SSA alone makes all final determinations on your eligibility for benefits and the benefit amounts. Our advice on claiming strategies does not comprise a comprehensive financial plan. You should consult with your financial adviser regarding your individual situation.