At the end of August, the Trustees of the Social Security trust fund reported that the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, would only be able to pay scheduled benefits on a timely basis until 2033. This was one year earlier than reported in last year’s report.
On the surface this doesn’t sound good, especially when you read headlines like this one.
What this fails to mention is that the Trustee’s Report would still be able to pay 76% of scheduled benefits past that date, meaning those receiving their benefit would see a drop of about 24%.
Now a 24% decrease to one’s cash flow isn’t nothing, but it’s not as awful as reading that Social Security is going to run out of money and assuming that those currently receiving Social Security benefits are going to be hung out to dry.
Here’s the thing, there’s no politician on earth who is going to let this happen, it would be career suicide. Would you want to be the person who went down in history for slashing retirement benefits by 24%? Me neither.
What’s more likely to happen is that there will be some sort of change in legislation that tweaks the calculation in how taxes are collected or how benefits are paid out.
There are many ways this can be accomplished. Here are just a few.
Increase Payroll Taxes
Right now, taxpayers contribute 12.4% to Social Security. That comes out to 6.2% for workers and 6.2% for employers.
Increase the Wage Base
For 2021, the wage base that is subject to this tax is $142,800 and will increase to $147,000 in 2022. If your income is less than this amount, you, as an employee, are subject to the 6.2% tax on your entire pay. If you make more than this amount, you stop paying tax on anything above this amount. For example, someone making $147,000 in 2022 will pay about $9,100 in tax starting next year. Someone making $250,000 will also pay $9,100, as the amount from $147,001-$250,000 isn’t subject to tax.
Modifying COLA
Cost of living adjustments just went up 5.9% for 2022 due to the quick rise in inflation we’ve seen this year. Inflation at its peak was about 5.4%. Giving more than a 1-for-1 increase on benefits might be one of the best hedges on inflation out there. Not tracking inflation so closely might be something that’s considered.
Increase Benefit Ages
You can take benefits as early as age 62 at a reduced amount, or you can take at age 66 or 67 depending on your birth year and full retirement age. Bumping either one of these age limits out could be a possibility.
Include More Working Years
Social security uses your average wages for 35 years to calculate your benefit. If more working years were included, like those lower income years at the start of one’s career, benefits could be modestly decreased.
Lower the Level at Which Social Security is Taxable
This might be a harder sell as 50% of Social Security benefits are already taxed if you have more than $32,000 in income and up to 85% of benefits are taxed for those with incomes above $44,000 (for taxpayers who are Married Filing Jointly).
If history is any indication, it’s that people who are nearing retirement age wouldn’t be significantly impacted by any future changes made to social security.
This happened in 1983 when the Social Security Amendments of 1983 went into law. This taxed some benefits and slowly increased the Full Retirement Age from 65 to 66 (for those born in, or after, 1943) and 67 (for those born in, or after, 1960).
In 1983, people born in 1943 were 40 years old and those born in 1960 were 23 years old. This change in full retirement age did not impact anyone who was or was close to receiving their benefit.
It’s possible we could wind up with a combination of some or all of these things to give the trust fund the extra boost it probably needs. Congress has already proposed a plan to get the ball rolling with what they are calling Social Security 2100: A Sacred Trust.
There’s not a whole lot we can do about potential changes yet to come, but fortunately 2033 isn’t around the corner. There’s time for lawmakers to figure it out and plenty of time to plan for the future.