Social Security may not be able to pay full retirement benefits as early as 2033, according to current projections program administrators.
If Congress does not take action to address the situation by then, millions of retirees are widely expected to experience an overall decline of 21%. reduction of benefits.
The effects of this loss of income could be enough to cause a pension crisisbecause it would double the elderly poverty rate and reduce the median income of elderly households by almost 14%, according to new search from the American Enterprise Institute.
Yet these massive benefit cuts would not necessarily be necessary, as the worst effects of insolvency could be avoided through executive action, the report said.
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Instead of across-the-board benefit cuts, benefits could be reallocated to avoid an increase in poverty for low incomes while having only a small effect on the middle class, according to Andrew Biggs, senior fellow at the AEI, who co-authored the study. report with Kristin Shapiro, attorney at BakerHostetler.
“It means big cuts for the very wealthy, but it avoids what could be seen as a pension crisis, where everything is turned upside down,” Biggs said.
Why Social Security Trust Funds Face Exhaustion Dates
Social Security draws from multiple sources to pay its benefits – ongoing revenue from social charges and income taxes, as well as trust funds that are used to supplement the monthly checks beneficiaries receive.
Yet as more people collect Social Security retirement benefits, the trust fund used to pay those benefits is dwindling. The depletion date – currently 2033 – represents the point at which the fund will be exhausted.
At this point, 79% of these benefits are expected to be payable.
Social Security has several trust funds, including one that pays retired workers, their families and survivors, and a second that pays disability benefits.
Together, these trust funds are expected to run out in 2035, at which point 83% of benefits would be payable. Although merging the funds could provide additional financial flexibility, this is not permitted under current law, according to the AEI report.
How could major benefit cuts be avoided?
As the November election approaches, experts are generally hopeful that a new president and a new Congress will address the solvency of Social Security.
“We much prefer that Congress pass comprehensive Social Security reforms before 2033,” the AEI report said.
The sooner Congress acts, the better for all affected beneficiaries to give them more certainty, said Shai Akabas, executive director of the Bipartisan Policy Center’s economic policy program. A recent survey by the Nationwide Retirement Institute found 72% of adults worry that Social Security will run out of funding during his lifetime.
The across-the-board benefit cut of around 21% is “untenable and unsustainable, both politically and financially from a household perspective,” Akabas said.
However, if lawmakers fail to reach an agreement before the exhaustion date, the president could take steps to protect recipients from the worst effects of the resulting cuts, according to Biggs and Shapiro.
Once the exhaustion date is reached – whether it remains 2033 or is postponed to another year – the then-president could decide to cap monthly benefits at around $2,050, the report suggests. AEI.
This change would reduce payments to beneficiaries who receive more than this amount and make Social Security solvent without adding new debt or raising taxes.
At the same time, about half of all retirees and survivors would continue to receive their full benefits. Notably, according to the study, no retiree would be pushed into poverty.
If the funding exhaustion date were to pass, lawmakers would face an unprecedented situation.
What happens next will depend on the interpretation of constitutional law. This could give rise to litigation, the report notes, including from beneficiaries who may not receive the benefits they were promised.
