The state of social security

Social Security is an integral part of most Americans’ retirement plans, providing approximately 65 million beneficiaries with income benefits earned through payroll tax contributions during their working years.¹

However, recent analysis from the Social Security Administration—and subsequent media coverage—has called the program’s long-term viability into question, sparking concerns among those who rely on this benefit (or expect to soon) in their retirement years.

What is Happening and How Did We Get Here?

Social Security benefits are partially funded through the Old-Age, Survivors, and Disability Insurance (OASDI) trust funds. According to the most recent report from the Trustees of Social Security and Medicare, these funds are expected to be fully depleted by 2034 without further action from Congress.²

Effectively, what this means is that Social Security benefits can continue to be paid at 100% of their current levels until 2034, at which point benefits could be reduced to approximately 80% of their current levels.³

The expected shortfall can be attributed to program underperformance over the last few decades, driven primarily by a higher volume of disability claims over the last few decades, lower-than-anticipated economic output, and a generally aging population.⁴

Importantly, this does not mean that Social Security will be eradicated by 2034. Rather, it means there could be a reduction in benefits to 80% of their current levels, assuming payroll tax revenues remain on their present trajectory and Congress does nothing to intervene.

Has This Happened Before?

The last time we came this close to insolvency was 1983. At that time, the National Commission on Social Security Reform (also known as the Greenspan Commission) warned of an impending crisis mere months before OASDI was expected to run out of funding.^5,6

In response, Congress and President Reagan passed the Social Security Amendments of 1983 in an attempt to temporarily extend the life of the program.⁷ Some of the material changes enacted by the legislation included the gradual increase of the full retirement age from 65 to 67, the partial inclusion of benefit amounts in gross income, as well as a temporary pause in cost-of-living adjustments.⁸

While the initial changes were projected to extend the life of the Fund through 2060, the aforementioned underperformance brings us to where we are today. It’s important to note that the magnitude of our current situation is thought to potentially be larger than the one we encountered in 1983. Still, we can look to this prior legislation to provide a blueprint for what may lie ahead.

Where Do We Go from Here?

While current conditions appear dire, there is still time to act. Congressional leaders have up to 10 years to find a solution to this funding problem. Given the breadth of options available, it’s hard to know exactly which avenue they’ll take. However, considering that we currently find ourselves in an election year, we can monitor the ongoing political discourse for clues.

One commonly cited option is increasing the maximum amount of income that is subject to OASDI taxation in a given year (currently set at $168,600 in 2024)⁹—otherwise known as the wage base.

Increasing the wage base would effectively increase current payroll tax revenues, providing liquidity to the program.

Congress could also change the way Social Security calculations are conducted (i.e. the bend points) in order to make the program more progressive in nature. This would have the effect of limiting the impact of the shortfall on lower-income beneficiaries, potentially at the expense of those at higher income levels.¹⁰

Lastly, Congress could look to the Social Security Amendments of 1983 for other ideas, such as raising the full retirement age or increasing OASDI tax rates. While this list is not intended to be exhaustive or a prediction of things to come, it does provide us with some ideas that we can plan around in the coming years.

Clients do not need to take action at this time. Our team is monitoring the situation and will share further updates as more details become available.

If you have any questions about Social Security, retirement, or any other financial planning matters, please contact your Westmount advisor. You can also call us at 310-556-2502 or email info@westmount.com.