By:  Michael Allbee, CFP®, Senior Portfolio Manager

Social Security isn’t in danger of going broke since it’s financed primarily through payroll taxes, but the financial health of the Social Security trust fund is declining, and benefits may eventually be reduced unless Congress acts. The Social Security Board of Trustees has estimated that its trust fund has reserves to pay all scheduled benefits only until 2033. If Congress fails to act to shore up the system, benefits could be cut indiscriminately by 23%. This would equate to a $420 monthly reduction in the average monthly Social Security check ($1,827) for a retired worker.

The basic problem with the financing of Social Security is one of demography. Beneficiaries are living longer, while low fertility rates mean that fewer people have been entering the labor force over time. If there is a will by Congress to engage in serious discussions, there is a path to putting worries about the long-run viability of the program behind us. It was done before in 1983 with the support of both political parties – Congress enacted changes that fixed about two-thirds of the long-run funding requirements estimated at the time.

Many options have been proposed and combining some of these may help soften the impact of any one solution. For example, the Committee for a Responsible Federal Budget (CRFB) estimates that raising the retirement age by two years to age 69, and then indexing it to longevity, would close 39% of the 75-year funding shortfall. Or the CRFB has estimated that if, instead, all wages were subject to the Social Security payroll tax (instead of the first $160,250 in wages), 63% of the long-run funding gap could be closed. Here is an interactive tool to see how you can fix Social Security.

Tampering with Social Security has always been considered political suicide because of the political clout of seniors, but consider this: those considered Millennials and younger (born after 1980) will outnumber the rest of the older voting population (mostly baby boomers) around the 2028 election and will subsequently get relatively bigger and bigger. With intergenerational inequality at near record highs, Congress may want to stop kicking the can down the road sooner than later.

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