Over 6 million people currently receive Social Security benefits. But, according to the Congressional Budget Office (CBO), in 2032, the Old-Age and Survivors Insurance (OASI) Trust Fund will help nearly 78 million Americans or about 20% of the country’s total population.

The Social Security and Medicare trusts’ trustees and the CBO have highlighted concerns about how quickly Social Security will become “insolvent.” Insolvency in this context refers to the point at which payments would only be made from income obtained from payroll tax and income tax on benefits and the trust fund would have been completely emptied.

The impending shortfall

According to the 2023 Trustees Report, the OASI Trust Fund can only pay 100% of all scheduled payments until 2033. That is one year sooner than the trustees had anticipated the previous year. Then, the program could pay 77% of the planned benefits. Even worse is the CBO’s forecast. It estimates that the OASI fund will run out in 2032. It also claims that payable benefits would be 25% less than scheduled benefits.

One reason for the trust fund’s shrinking is the diminishing ratio of employees to beneficiaries. The retirement of Baby Boomers has only intensified this tendency. High interest rates and long-term inflation also have a significant impact. Beneficiaries had an 8.7% cost-of-living adjustment (COLA) in 2023 due to inflation, the highest increase since 1981.

The Congressional Research Service claims that there will be a conflict between two federal laws whenever the trust fund runs out. The Social Security Act’s total scheduled payments would still be available to beneficiaries. However, the Social Security Administration (SSA) could not fulfill its legal obligation to pay total costs on schedule since the Antideficiency Act forbids the federal government from spending more than it has in its coffers.

Some recent proposals

Despite its status as a third-rail issue, several lawmakers from both parties are addressing the Social Security solvency threat. For instance, the Social Security Expansion Act proposal in February 2023 came from Senators Elizabeth Warren (D-MA), Bernie Sanders (I-VT), and other Democratic colleagues.

This would, among other things, apply the payroll tax to income over $250,000 without using the increased taxable income toward benefits. Additionally, it would alter the inflation index for COLAs and levy a 12.4% tax on investment income. As a result, the combined OASI and Disability Insurance program could pay scheduled payments in full and on time for an additional 75 years, according to an assessment by the SSA’s Office of the Chief Actuary. The law would also increase beneficiaries’ annual benefits by $2,400.

A bipartisan alliance led by Senators Angus King (I-ME) and Bill Cassidy (R-LA) is looking at other solutions. They plan to establish a “sovereign wealth fund” distinct from Social Security. The fund would put at least $1.5 trillion into the American economy, earning profits over 70 years. The maximum taxable income and the payroll tax rate would be raised to guarantee solvency for 75 years if it does not provide an 8% return. According to Cassidy, this strategy would “solve 75% of the problem.”

The future of Social Security benefits

Both sides agree that addressing Social Security is necessary. Democrats typically oppose benefit reductions, whereas Republicans typically oppose tax increases. Additionally, there is no conducive political environment for forging a deal. We’ll monitor the situation and let you know if any substantial changes could affect you. Contact our RRBB accountants and advisors if you have questions. In the meantime, keep an eye out for the second part of this blog series for more details.

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