We all know that Social Security benefits assist millions of Americans not only in retirement, but also those with severe and permanent disabilities that prevent them from performing in a lucrative activity or job. However, Social Security benefits alone are not enough to cover the entire living costs of these people and the slightest cut can throw their household economies out of whack.
Although Social Security benefits only replace a little more than 40% of pre-retirement income, studies indicate that older adults need between 70 and 80% of their previous income in order to maintain their lifestyle.
The situation could get worse for these individuals if the Social Security Administration (SSA) and its programs go into crisis, and that’s not an entirely ruled-out scenario. According to a 2024 report by the Social Security Trustees, the trust fund that supports social security and its operation would run out of money by 2033, that is, in less than 9 years.
Where Did Your Social Security Taxes Go?
As you know, the money you pay every month in social security taxes is not exactly “your money” but those contributions pay for the retirements and benefits of the people who currently receive it. When it’s your turn to receive them, the people who are paying their taxes at that time will contribute money that will become your monthly check.
The law prohibits the SSA from borrowing to cover the shortfall, as paying it back would be an even bigger and long-term problem. As a result, if the trust fund runs out, the benefits could be automatically reduced and people who are collecting at the moment would not receive 100% of the promised or due benefits.
Thus, if the Old Age and Survival Insurance Trust Fund (OASI) is exhausted, beneficiaries could see a reduction of up to 21% in their monthly payments, then receiving only 79% of the promised benefits.
Is There a Solution to Avoid This Scenario for Social Security?
In fact, there is a possibility to avoid this gloomy scenario, but it is not definitive. The temporary solution involves the merger between the OASI fund and the Disability Insurance Trust Fund (DI), as the latter is considerably more solvent and solid than the former.
This temporary merger process could extend Social Security’s ability to cover benefits until 2035, although, as you might be noticing, it would only delay that fateful “day zero” by a couple of years.
Another emergency tool that the SSA would have to apply is to stop applying the cost of living adjustments (COLA), a tool that Social Security (and other programs such as SNAP and TANF benefits) uses to prevent beneficiaries from losing purchasing power each year in the face of inflation.
Historically, at another time when Social security has been in trouble, congressional lawmakers have chosen to raise the retirement age. For now there are no indications that something similar will be carried out and lawmakers are expected to discuss new plans to prevent the collapse of Social security.
Letters From the Social Security Trustees to the Congress
The Board of Trustees of the Federal Retirement and Survivors Insurance and Federal Disability Insurance Funds has issued a report addressed to the Honorable Mike Johnson, Speaker of the House of Representatives, dated May 6, 2024, in which they warn about the critical situation of Social Insurance Trust Funds. According to the report, the asset reserves in the Old-Age & Survivors Insurance Trust Fund (OASI) are projected to become insufficient over the next 10 years, with an estimated depletion by 2033 if legislative action is not taken.
The report highlights that, according to the Social Security Law, the Board of Trustees is required to submit recommendations for statutory adjustments that keep the balance sheet ratio of Trust Funds at least 20 percent. In case the balance sheet ratio falls below this threshold, the obligation is established to inform the Congress and propose measures to maintain the solvency of the funds.
It is highlighted that, under the interim projections of the 2024 Trustees’ report, the OASI Trust Fund will be affected, with a decrease in reserves leading to a depletion in 2033 if changes are not implemented. This implies that, if no measures are taken, only about 79% of the scheduled benefits could be payable at that time, which would represent a significant impact on the beneficiaries of the Social Security system.
The Board recommends that legislators act promptly to strengthen the actuarial status of the OASI Trust Fund. It is suggested that actions could include increasing income to the fund, reducing costs through modifications to benefit levels or program eligibility requirements, or a combination of both approaches. These measures are essential to ensure the stability and sustainability of the Social Security system in the long term.