Countdown to 2033: Can Social Security be fixed in time?

SOCIAL SECURITY RECIPIENTS WORRIED they wouldn't receive their benefits during the latest debt ceiling crisis. That issue was resolved when Congress passed the bill averting government default in June 2023. Yet larger problems threaten this retirement program, which has supported millions of Americans since the 1930s.

"At current funding and spending levels, Social Security could be insolvent by 2033, according to the Congressional Budget Office," says Mitchell Drossman, head of National Wealth Strategies, Chief Investment Office, Merrill and Bank of America Private Bank. That's a year earlier than projected by the Social Security trust fund's board of trustees in their 2023 annual report.Footnote ¹

Congress will face sizable pressure to prevent insolvency before then, Drossman adds. "Still, retirement savers should review their own retirement funding plans and stay aware of developments in Congress." A recent Chief Investment Office report, "Social Security insolvency: What can be done and what's at stake? (PDF)," answers key questions about projected shortfalls, possible solutions and what individuals need to know about their own benefits. Here are some highlights.

Social Security funding comes mainly from employer and employee payroll taxes of 6.2% each (12.4% total) on wages up to $160,200 per year. The challenge: "As baby boomers continue to retire, Social Security payouts are increasing a lot faster than contributions," Drossman says. "In 2022 alone, the system posted a $22.1 billion deficit."Footnote ²

That's not fully clear, Drossman notes. Insolvency means that the trust fund is unable to pay benefits in full and on time. It does not mean that Social Security will be completely eliminated and unable to pay any benefits. But future benefits could only be paid from taxes collected, which would cover roughly 80% of benefits. While beneficiaries would still be legally entitled to their full scheduled benefits, the federal Anti-deficiency Act prohibits government spending in excess of available funds. Since current contributions wouldn't meet the full obligations, recipients might receive timely but reduced payments or be paid in full but on a delayed schedule.

A wide range of potential solutions have been proposed, including increasing the full retirement age, hiking the payroll tax on wages over a certain amount, and reducing benefits for higher lifetime earners. As for when a fix needs to be implemented, "the short answer is now," Drossman says. Waiting until the brink of insolvency could place outsized burdens on contributors and/or beneficiaries a decade from now.