Without significant reforms in its pay structure, Social Security payments may be facing an impending collapse in 2033. At least, these were the conclusions outlined by the Congressional Budget Office in their latest report, which was released on December 16, 2022.
In economic terms, a 10-year deadline is an urgent one. With barely two election cycles left and a political scene mired in permanent gridlock, it is important to re-examine the country's economic policies. Only by looking realistically at the upcoming revenues can we continue to pay our dues to the old and disabled.
Which Funds are at Risk?
Established in 1935, as the country recovered from the Great Depression, the Social Security Trust Funds were created to ensure the economic security of at-risk people.
Currently, Social Security encompasses two different programs. Combined, they constitute the largest item in the Federal Budget. Both programs are funded by employers' and employees' contributions. According to 2022 projections, both programs are currently at risk of collapse.
The Old-Age and Survivors Insurance (OASI) Trust Fund
This is the largest of both Social Security programs and provides a pension for retired workers, their spouses, and underage children. To become eligible for benefits under OASI, workers must have at least 10 years of employment and be at least 65 years old (or 62 if a person chooses to receive a reduced pension).
The OASI fund currently accounts for 73% of all benefits paid by Social Security. Due to the relatively large amount of people set to retire within ten years, and the stagnant salaries received by a large share of the population (which have therefore decreased the money collected on payroll taxes), OASI funds will be depleted by 2033
The Disability Insurance (DI) Trust Fund
The DI Fund provides benefits to 12% of all Social Security beneficiaries. This Fund provides a basic income for people who cannot work for at least a year or are expected to die from their condition. In addition, the DI Fund also includes the Supplemental Security Income program, which provides for disabled adults and children who can work but do not have enough resources to support themselves.
As this program has fewer beneficiaries and no immediate increase in disability is expected, it won't be depleted until 2048.
What Is Driving the Collapse?
In both cases, the impending deficits come down to the fact that the money coming in through payroll taxes is insufficient to cover the money that has to be paid that year.
The main driver behind this is demographic changes: people now live longer, and the largest generation of Americans (the "Baby Boomers") are now hitting retirement age. At the same time, more recent generations have progressively been smaller, decreasing the number of people paying payroll tax. With this in mind, a series of reforms in the 1980s raised the retirement age and increased payroll taxes. Nonetheless, Social Security Funds have been running a deficit since 2010.
Each time this happens, the trust funds essentially borrow funds from the public. Then, when this money needs to be repaid, it slowly chips away at each Fund's reserves. Once reserves run out, Social Security won't be able to borrow anything else to meet its scheduled payments.
So what happens to those who are receiving benefits when that happens? First, they will see an immediate cut to their monthly benefits – of approximately 20%. In subsequent years, their monthly payouts may dwindle further.
Can Social Security be Set Right?
In its report, the Congressional Budget Office also listed several recommendations that may keep it afloat for a few extra years. The most obvious ones are to raise the retirement age to 70 and slowly decrease monthly benefits ahead of time.
However, payroll taxes may need to be raised to secure long-term stability. Other potential reforms may include setting a "benefits cap" for high earners or even setting benefits to a flat amount. None of these reforms is likely to be popular, yet the time to enact them is officially ticking.
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