- Social Security funding is expected to run out over the next 10 years, at which point 80% of benefits will be paid out.
- A new report finds that acting now could prevent even more dramatic changes down the road.
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The clock is ticking for Congress to strengthen Social Security benefits.
According to the latest projections from Social Security actuaries, the program’s trust fund will be Scheduled to run out in 2034At that point, 80% of the benefit will be paid.
According to one report, if Congress does not act by 2034, the program could result in an automatic 20% benefit cut for current beneficiaries, a 25% increase in Social Security taxes, or a combination of benefit cuts and tax increases. You may face a combination. new report Graduated from the American Academy of Actuaries.
This program has been here before.
When Congress passed a number of changes in 1983, Social Security’s trust fund also neared depletion.
However, there were some benefits back then that may not be available today. For example, benefit changes such as raising the retirement age took longer to be phased in.
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Moreover, the cash shortage was only 1% of taxable payroll. Currently, this amount is three times taxable profits, or 3.12%, according to the American Academy of Actuaries.
Addressing the problem early can help in several important ways, according to member professional organizations.
If we act early, it will be less likely that a 25% payroll tax hike will be necessary in 2034.
Furthermore, benefit reductions may also be reduced.
Making adjustments now can also give current and future beneficiaries a better understanding of what will happen.
“The sooner Congress comes together and comes up with options to address these challenges, the better for the American people,” said Linda K. Stone, senior pension fellow at the American College of Actuaries. Stated.
“It’s going to take more time for individuals to understand what’s going on and adjust their financial plans,” she says.
The agency has recently moved to dispel concerns that the program’s shortfalls will deplete Social Security benefits, according to polls.
Stephen Goss, the security agency’s chief actuary, said in a recent interview with the agency that the program’s funding is “far from being able to pay any benefits.”
“So people don’t have to worry, as is sometimes said, about the trust fund running out of money and not being able to pay benefits,” he said.
Lawmakers could choose from the following menu of changes to make up for the 2034 shortfall, according to a report from the American College of Actuaries.
1. Eliminate tax caps and tax all profits. Currently, up to $160,200 of earnings are taxed for Social Security purposes. Removing this cap could encourage high-income earners to pay more into the program. According to the American Academy of Actuaries, this change will only cover 78% of the shortfall in 2034 and will require other changes.
2. Tax all earnings over $400,000 or make 90% of all earnings subject to payroll taxes. These two changes could cover 55% and 36% of the shortfall, respectively, according to the report.
3. Increase the payroll tax rate by 25%. Increasing the Social Security payroll tax rate from 6.2% to 7.75% for both workers and employees could be enough to pay 100% of benefits in 2034. However, that may not be enough to cover all subsequent benefits. Additionally, higher tax rates could be a burden for low-income workers.
4. Tax returns such as investment income, property, gifts, and interest. The report notes that social security taxes are not levied in these areas, which could lead to resistance. Changes could be implemented in stages, but would need to start sooner to close the 2034 shortfall, the report said.
1. Cut benefits for high-income earners who haven’t yet claimed. Lawmakers could approach this in different ways. People at the maximum benefit level could see their replacement rate drop from 15% to 5% over five years. The replacement rate for people earning above the median income could be lowered from 32% to 10%. It could also choose to limit increases in initial payments to citizens to a taxable limit of $160,200. Alternatively, means testing could cut off benefits to people with high incomes and assets. These proposals would have different effects on the 2034 shortfall.
2. Gradually raise the full retirement age. Full retirement age is the point at which a beneficiary is eligible to receive 100% of previously earned benefits. Based on the amendment enacted in 1983, that age will be raised to 67 years. Lawmakers may consider raising that age to reflect longer lifespans and careers. This could involve raising the age by about one month every two years, or by two months a year for 12 years. These changes, if implemented soon, could each impact between 3% and 10% of the 2034 shortfall. Importantly, these policies could be combined with offsets to protect low-income people who live short lives and may not be able to work for long.
3. Reduce your annual cost of living adjustment. Social Security’s annual cost-of-living adjustment metric could be changed to a chained consumer price index, which would reduce benefit increases by about 0.3 percentage points each year.According to the American Academy of Actuaries, this change will cover 13% of the shortfall in 2034.. By comparison, another proposal to change the COLA measure to Consumer Price Index for the Elderly (CPI-E) would increase annual benefit adjustments by an average of 0.2 percentage points. Meanwhile, the change would increase costs by about 8% of the 2034 shortfall, the report said.
Other changes may also be implemented, but may not affect the 2034 shortfall, the report said.
Additionally, addressing the shortfalls by the 2034 deadline may not permanently fix the program, the report said.
Earlier this year, the American Academy of Actuaries launched a tool that allows consumers to decide which combination of changes to choose to strengthen their Social Security finances.