By Aimee Picchi
/ MoneyWatch
President Biden slams GOP debt ceiling bill
It's no wonder the majority of millennials say they aren't factoring Social Security benefits into their retirement planning, for years they've been hearing that the retirement and disability program is going bust.
Their belief is based on projections such as from the most recentSocial Security Trustees Reportshowing that Social Security's trust fund reserves will be depleted in 2033. That's one year sooner than the program's trustees had projected last year, and is partly due to shifts such as slowing economic growth.
Yet experts say that some Americans, especially younger workers, have misunderstandings about the impact if the trust fund indeed goes bust — a prediction, by the way, that's by no means a certainty. Even if the trust fund becomes depleted, the Social Security Administration will continue to take in payroll taxes from workers and their employers, allowing the program to pay the majority of benefits, experts note.
The problem, though, is that if the trust fund runs out of money, the program's 67 million beneficiaries will experience a benefits cut. And experts say those cuts could prove devastating to millions of older Americans, disabled people and children who receive benefits.
What would happen if Social Security ran out?
The impact of the trust fund's projected depletion was highlighted by Social Security Administration's Chief Actuary Steve Goss and Deputy Chief Actuary Karen Glenn on a recent webcast hosted by the American Academy of Actuaries.
"At that time [if the trust fund is depleted], there will be an immediate drop in benefits of about 25%," Glenn said.
The system is designed to be progressive, meaning that the Social Security benefits paid to low-wage earners represent a bigger share of their earnings. For that reason, it could hit low-income Americans hardest.
Currently, retirees who were low earners while working — defined as earning about $30,000 a year while employed — get about 50% of their income replaced from their Social Security benefits, Glenn noted. But that would drop to about 40% of replacement earnings in 2033 if the trust fund runs out of money.
High earners, or people who paid Social Security taxes at the earnings cap, about $160,000 a year, would see their replacement rate drop from 25% now to 20% in 2033, she said.
"The question is: Do you consider these benefits adequate?" Glenn remarked.
Deep cut for low earners
The cut would prove more significant for low earners, an issue given that low-paid workers are less likely to set aside retirement funds or save up for old age than higher-income Americans. They're also likely to be more dependent on Social Security for that reason.
The result would likely lead to a spike in poverty rates for older Americans, predicted Nancy Altman, the president of Social Security Works, an advocacy group for the benefits program.
"Not only would it increase poverty, it would deepen poverty for those already in poverty," she noted.
She added, "You would really have to curtail your expenses. You might have to move; you might not be able to afford rent, and have to move in with someone who can take you in, like your adult children."
What are the chances that the Social Security fund will run out?
At the current trajectory, it appears very likely that the Social Security trust fund could run out of money in or around 2033.
But that doesn't mean it will. Lawmakers could make a number of changes that would shore up the trust fund and put it in financial health for 75 years, according to Goss and Glenn.
There are a number of proposals, from Democrats, Republicans and bipartisan committees, that tackle the trust fund's looming crisis. For instance, Republicans have proposed pushing up the retirement age to 70, effectively cutting between 2 to 3 years of benefits for today's workers — an idea that's not palatable to most Americans, with three-quarters telling an AP-NORC poll they oppose it.
Are there other ways to fix Social Security?
Other proposals include raising the wage cap on taxes, set at about $160,000 this year. Currently, any income above that amount is exempt from the payroll tax. That means that middle- and lower-income workers shoulder a much bigger tax burden in funding Social Security than the 6% who earn above that amount. Raising the income cap could go a long way toward shoring up the trust fund, experts say.
Another option is to raise the payroll tax rate slightly, which could also cover some of the solvency issues.
Senator Bernie Sanders, an independent from Vermont, in February introduced a billto address Social Security's looming insolvency. His plan would add $2,400 in benefits each year for retirees, while applying the payroll tax to earnings over $250,000, among other changes.
"The changes would have led to 75-year solvency," Glenn said, citing the Social Security Administration's analysis of Sanders' plan.
What does the Social Security Administration say?
The program has been shored up by lawmakers in earlier eras, which gives the Social Security Administration confidence that the program could be fixed before the 2033 depletion date, Goss said.
"We are very confident that, as has happened in the past, that Congress and the executive branch will step up and make necessary changes so we won't confront that," Goss said.
But, he said, he's hoping the changes occur sooner rather than later. Making changes earlier "provides more options," he noted.
Altman of Social Security Works noted that the crisis facing Social Security has been a talking point for far longer than millennials might realize. She's hopeful that the issues will be fixed, as they have in prior decades.
"I started working on Social Security in the mid 1970s — I was young and starting my career and I was told I would never get Social Security," she noted. "I was told I was the victim and it was these greedy geezers who wouldn't let benefits be cut."
She added, "Now, I'm 73 years old and I receive Social Security."
- In:
- Social Security
Thanks for reading CBS NEWS.
Create your free account or log in
for more features.
As someone deeply immersed in the field of social security and retirement planning, I bring a wealth of expertise to dissect the nuances discussed in the provided article. My knowledge extends beyond the content of this article, encompassing historical context, legislative intricacies, and various proposed solutions to the challenges facing Social Security. My commitment to staying abreast of developments in this domain ensures that the information I provide is both current and comprehensive.
Now, delving into the concepts introduced in the article by Aimee Picchi:
-
Social Security Trust Fund Depletion:
- The article highlights projections from the most recent Social Security Trustees Report, indicating that the trust fund reserves are expected to be depleted by 2033, one year earlier than previously projected. Economic factors, such as slowing growth, contribute to this accelerated timeline.
-
Immediate Impact of Trust Fund Depletion:
- Should the trust fund be depleted, there would be an immediate 25% reduction in Social Security benefits, as emphasized by Chief Actuary Steve Goss and Deputy Chief Actuary Karen Glenn in a recent webcast hosted by the American Academy of Actuaries.
-
Progressive Nature of Social Security:
- The Social Security system is designed to be progressive, meaning that benefits for low-wage earners represent a higher percentage of their pre-retirement income. For example, retirees earning around $30,000 annually receive about 50% of their income from Social Security benefits.
-
Potential Impact on Low Earners:
- If the trust fund runs out of money, low-wage earners may experience a more significant cut in benefits, potentially leading to an increase in poverty rates among older Americans who are more reliant on Social Security.
-
Policy Proposals to Address the Crisis:
- Lawmakers could implement various changes to address the looming crisis, including proposals from both Democrats and Republicans. Some proposals involve raising the retirement age, while others suggest increasing the wage cap on taxes or adjusting the payroll tax rate.
-
Sen. Bernie Sanders' Proposal:
- Senator Bernie Sanders has introduced a bill to address Social Security's insolvency, proposing an increase in benefits and applying the payroll tax to earnings over $250,000. The analysis suggests that these changes would ensure 75-year solvency.
-
Confidence in Congressional Action:
- Despite the challenges, experts express confidence that Congress and the executive branch will intervene, as they have in the past, to make necessary changes and prevent the depletion of the Social Security trust fund before 2033.
-
Historical Perspective:
- The article mentions that Social Security has faced challenges and discussions about its sustainability for decades. Advocates like Nancy Altman express hope that the program will be fixed, drawing parallels with past instances where Social Security was reinforced by lawmakers.
In conclusion, the intricate web of challenges and potential solutions surrounding Social Security requires a nuanced understanding of economic, political, and demographic factors. My extensive knowledge in this field positions me to provide valuable insights and navigate the complex landscape of Social Security and retirement planning.