Social Security provides a significant amount of retirement benefits, the largest being an indexed income stream to cope with the issue of inflation that the beneficiary citizens cannot afford, the program was created to provide assistance to American citizens and thus avoid running out of money when they retire.
In a government report that was released Monday afternoon, they issued new estimates of the budget outlook for Social Security, which provides critical benefits for retirees, worker survivors and some people with disabilities. The report is expected to warn about automatic benefit cuts starting in the 2030s because the program is paying out more than it takes in, which at some point will cause its trust fund to run out.
A similar warning is expected for Medicare, the federal health insurance program for U.S. citizens 65 and older and people with disabilities. Here’s what you need to know about how Social Security works, what steps could lead you to solvency, and how to be ready for potential benefit declines.
What Is Social Security?
Social Security is a social welfare program that President Franklin Delano Roosevelt created in 1935 as part of the New Deal. Initially designed and still functioning as a retirement safety net, it has expanded significantly over the years.
In 1939, Social Security added a survivor benefits program, and then disability insurance in 1956, in 1965 was the creation of Medicare as a national health insurance plan for the elderly, followed by Supplemental Security Income in 1972 to provide assistance to blind and disabled children and adults. Today, about 20% of U.S. citizens have some kind of Social Security benefit.
How Is Social Security Financed?
The financing comes from a specific payroll tax, which is paid by employers and employees, each of the parties contributes 6.2% of gross wages on income up to $168,600 per year, any salary that exceeds that amount is exempt from Social Security taxes.
Medicare receives an additional 1.45% of gross wages, increasing total deductions to 7.65% per employee.
These contributions are required by the Federal Law on Insurance Contributions, which is found on their salary receipt as a FICA, self-employed workers, on the other hand, are responsible for paying their share in addition to the other half that the employer would pay, which means that they must disburse more than 15.30% of their income.
Worries Answered: Is the Trust Fund Running Out?
For many decades, the government has predicted that the Social Security Trust Fund will become insolvent at some point, with the passage of time, the baby boomers have aged, and therefore there are more retirees with respect to workers who pay Social Security taxes.
Every year, the Board of Directors of the Social Security Administration (SSA) presents a report on the status of the trust fund, the report that was presented in 2023 estimated that it will be exhausted in 2034, one year earlier than it predicted in 2022, this as part of the effects of the pandemic.
But focusing on the real numbers is a challenge, because the estimate has to take into account variables such as the size of the economy, tax revenues, birth rates and immigration.
The gap between what is expected to be collected and what is paid is about 3.5%, according to the 2023 report, the possible solutions to solve this financial problem include the politically treacherous options of making an increase in the payroll tax, cutting benefits, a combination of those two, or assuming more public debt to reaffirm the system.
If the authorities decided to increase taxes to maintain the solvency of the fund for the next 75 years, the income would have to have an increase, raising the payroll tax rate by 3.44%, to 15.84%, the salaried would see their participation go from 6.2 to 7.92%, if they took the second option they would have to cut benefits by 21.3%.