What You Need to Know
- In 2035, taxes taken in will cover only about 80% of the benefits paid out each month.
- In theory, that missing 20% could be paid for by other taxes, or by running bigger deficits.
- Politicians who chose to ignore Social Security’s financing issues appear to be banking on a return to low rates and negligible inflation.
Social Security is known as the third rail of politics. President Joe Biden has pounced on all who dare even think about curtailing the retirement program. In fact, this week cash-strapped retirees will get the biggest cost-of-living increase in 40 years, an 8.7% boost to protect them from inflation.
For many retirees on fixed incomes, that’s a godsend. Some Republicans are considering reforming the program, an idea that could be political suicide. It’s also the right thing to do.
The Social Security trust fund reserves are expected to run out of money in 2035. At that point, taxes taken in will cover only 80% of the benefits paid out each month. If nothing is done, that could mean Social Security recipients are in store for a 20% benefit cut. Recent inflation may speed up this time frame.
Benefits are indexed to inflation and the tax revenue that covers the benefit increases is based on wages. If wages rise more than inflation, then Social Security stays on track. But in the last year inflation has risen more than wages, which could hasten Social Security’s shortfall date.
Already, many Americans think they can’t rely on Social Security. In 2019, 42% of those polled expect no benefits at all by the time they retire.
This suggests some serious cognitive dissonance. Many Americans know they need Social Security and are worried it won’t be there for them, but most also oppose reform.
The fact that so many people are worried that they will never see their benefits also suggests a very serious communications failure because the odds are Social Security will be there for everyone, in some form.
The very worst-case scenario is a 20% benefit cut. And odds are excellent even that won’t happen. Social Security is extremely popular, and it’s very unusual to subject pensioners to benefit cuts.
Most countries would sooner default on their bondholders than cut pensions. In theory, that missing 20% could be paid for by other taxes, or by running bigger deficits.