It is no secret that Social Security is having trouble, but most people like to exaggerate how bad the problem is.
People think that government benefits for retirement and other reasons will end in a few years, leaving them with no choice but to pay for their own retirements. Luckily, it is not going to happen. Even so, the situation is still a little scary.
A new report from the Congressional Budget Office (CBO) says that Social Security’s trust funds will run out in 2034.
If the government did not step in, claimants’ checks would be cut by 23% right away. There is no question that fixes are possible, but they are very expensive.
If you get Social Security payments or plan to get them in the future, you should understand this problem and how to solve it. This will help you get ready for any changes these policies might make to your finances.
How does the Social Security Administration get funded?
There are many parts to SSA’s problem with funding, but at its core are the changing demographics of society. To understand it, it is important to talk about where Social Security gets most of its money. There are three ways to make money:
Social Security contributions: Everyone who works in 2024 will have to pay this 12.4% tax on their first $168,600 in income.
The company and the worker each pay the same amount of tax. In 2023, it will bring in more than $1.23 trillion, which is most of the money for the program.
Interest earned on the Social Security trust funds: In the past, when SSA collected more taxes than it spent, the extra money was put into a trust fund and invested in stocks backed by the government.
The program got almost $67 billion in interest from these investments last year.
Social Security taxes: If your modified adjusted gross income (AGI) is more than $25,000 for a single person or $32,000 for a married pair, up to 85% of your income will be taxed as ordinary income.
This includes tax-free interest from investments and half of your annual Social Security benefit. Last year, these taxes brought in almost $51 billion.
In 2023, these sources brought in more than $1.35 trillion for Social Security, but that is not enough.
Program costs were about $1.4 trillion last year, and they are only going to go up because the 2025 cost-of-living increase will raise program costs and raise benefits at the same time.
The Social Security Administration has been able to fill this gap by taking money out of the trust funds. This will not last forever, but for now it does. Trust fund reserves are running low.
When they do, the government agency will only be able to pay out what it gets in payroll and benefit taxes.
Three reasons behind the possible depletion of Social Security trust funds
For a long time, taxes on Social Security were more than enough to keep the program going. Unfortunately, some big changes in the last few decades have made this method useless:
During many years, baby boomers made up the biggest group. This was good for the workforce because it kept the ratio of workers to beneficiaries high.
But as more baby boomers have retired, Social Security has had to pay out more to cover all of their payments.
Life expectancy has been going up in the US for decades, at least until recent years, when problems like the COVID-19 outbreak came up.
People who live longer are claiming Social Security benefits for longer, which means that more people are claiming at the same time as before.
In the US in 1960, women had 3.7 babies per woman. The number dropped to 1.7 by 2022. This means that fewer workers have taken over the tax-paying jobs of retired baby boomers.
This means that a program that helps an increasing number of seniors will get less money.
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