But if the headlines stemming from the annual report of the Social Security trustees jangled you, take a deep breath.
The report, released on March 31, forecasts that the Social Security retirement trust fund reserves will be depleted in 2033. A separate report found that Medicare's financial situation improved a bit last year.
But Social Security finished 2022 with $2.7 trillion in reserves, and it can pay full benefits for another 10 years, according to the report. Still, the program is on course for sharp across-the-board benefit cuts in 2033, absent action by the U.S. Congress.
What does the new Social Security forecast mean for current and future retirees? Here are the key questions to consider.
Q: What does "depletion" mean in the context of Social Security?
A: Social Security is financed on a pay-as-you-go basis. Benefits are funded mainly by the Federal Insurance Contributions Act (FICA) tax, which collects 12.4% of wages, split evenly by workers and employers. But the trust fund also can accumulate balances when Social Security runs surpluses, as has been the case for the last several decades. However, costs now are exceeding income as the baby boomer retirement wave accelerates. Another contributing factor is lower fertility rates in the U.S., which means we have fewer workers paying in to the system. Income inequality also plays a role.
The forecast depletion date often fluctuates a bit from year to year as the trustees re-evaluate the economic conditions that impact the program. This year, the downward revision was chalked up to lower labor productivity and economic growth.
Q: You mentioned that income inequality contributes to the problem. How so?
A: Social Security collects FICA contributions only up to a certain level of wages - $160,200 this year. In recent years, the largest increases in wages have been above that level, so a smaller share of the U.S. wage base is being taxed. The trustee report forecasts that this trend will continue over the coming 75 years. The costs to Social Security are substantial. Each drop of 1 percentage point in the share of total earnings subject to FICA reduces revenue by $12.6 billion, according to an analysis by the Economic Policy Institute (https://bit.ly/3U1jC7q).
Q: What happens if we get to the point where the trust fund is depleted?
A: At that point, the current revenue coming in would be sufficient to pay 77% of promised benefits, according to the report. In other words, there would be an immediate, across-the-board benefit cut of 23% - not only for current retirees, but for workers who retire down the road.
Q: Is it possible for Social Security to tap other sources of government revenue?
A: Under current law, no. The program must be financed solely from the trust fund, and it cannot borrow. That means Congress needs to enact legislation that would increase revenue, cut benefits or some combination of the two.
Q: What if Congress does not get its act together?
A: The closer we get to 2033, the less likely we are to see benefit cuts. Benefit reductions typically are phased in slowly for future beneficiaries, so the impact of any cuts would not be adequate to achieve solvency. "We've delayed so long that there are no plausible benefit reductions that can keep the trust fund from running dry in the 2030s," said Andrew G. Biggs, a senior fellow at the American Enterprise Institute.
At the point of a 2033 crisis, an emergency injection of new revenue is most likely, said Paul N. Van de Water, senior fellow at the Center on Budget and Policy Priorities. "Congress could allow the program to continue running deficits by changing the law to credit Social Security with additional income - in effect, it would be financing the program through borrowing."
That solution would avert the sharp benefit cuts, but it would further fuel public worries about Social Security. A 2020 AARP poll found that 57% of respondents are not confident about the future of Social Security, citing a lack of trust in government to keep its promises and that "money is running out."
Q: So what are the alternatives?
A: Democrats generally favor shoring up Social Security's finances by adding new taxes on the wealthy. Republican positions vary. The populist wing of the party has adopted a "don't touch Social Security" approach but has not spelled out how they would address the 2033 solvency forecast; conservatives in the House of Representatives have called for significant benefit cuts for all but the lowest-income workers by gradually raising the full retirement age (when you can receive 100% of your earned benefit) to 70, and through changes to the benefit formula that would sharply cut benefits for middle-income and affluent workers.
No consensus is in sight among lawmakers - but the public does have a clear position. The AARP poll found that a majority of Democrats, Republicans and independents agree that "it would be better to pay more into Social Security now to protect benefits for future generations." And a Quinnipiac University poll published last week found that 78% of Americans would oppose raising the full retirement age for Social Security from 67 to 70.
"If Congress did what the American people want them to do, they could get it done tomorrow," said Nancy Altman, co-director of Social Security Works, a progressive advocacy group.
The opinions expressed here are those of the author, a columnist for Reuters.
(Writing by Mark Miller; Editing by Matthew Lewis)
By Mark Miller
