Social Security benefits for retired individuals face potential reduction
The Social Security programme, a vital safety net for millions of Americans, is facing an impending insolvency by 2034, according to the annual reports released by the board of trustees of the Federal Old-Age and Survivors Insurance (OASI) Trust Fund and the Federal Disability Insurance (DI) Trust Fund.
The trust funds, which are currently funded by Social Security payroll taxes, are expected to be depleted by 2034. Once this happens, the Social Security Administration will draw from the OASI trust fund to continue paying benefits. Currently, revenue from Social Security payroll taxes can no longer cover scheduled benefits when the OASI trust fund is depleted.
Several potential solutions are being considered by Congress to address this expected insolvency. The key approaches include raising the payroll tax cap, increasing overall payroll tax rates, reducing benefits, combining the OASI and Disability Insurance (DI) trust funds, and enacting legislative reforms and other trust fund solutions.
One powerful reform being discussed is expanding the taxable income base so that higher earners pay Social Security taxes on all their income, not just up to the cap. This would mainly affect the top 6% of earners and could reduce the Social Security deficit by up to 73%, significantly extending the program's solvency without raising taxes on lower- and middle-income workers.
Another option is simply raising the Social Security payroll tax rate on workers and employers to generate additional revenue to cover future benefits.
Cuts to benefits, either across the board or targeted, are also on the table. Without changes, when the trust fund reserves are depleted by 2034, Social Security would only be able to pay about 77-81% of scheduled benefits, effectively a 19-23% benefit cut.
Combining the OASI and Disability Insurance (DI) trust funds theoretically extends solvency until 2034, though it does not solve the underlying imbalance.
Policymakers are urged to enact trust fund solutions sooner rather than later to avoid sharp benefit cuts. These could include a combination of tax increases and benefit adjustments or other reforms aimed at restoring long-term financial balance.
It is important to note that proposals such as the recently discussed "One Big Beautiful Bill Act" might accelerate insolvency rather than delay it, highlighting the complexity of legislative impacts on Social Security's finances.
The population of Americans age 65 and older is expected to jump from 58 million in 2022 to 82 million in 2050. A sizable portion of Social Security retirees rely on benefits as the primary source of income, and any potential cuts could lead to a crisis among this population.
Difficult decisions will need to be made over the next eight or nine years regarding Social Security's financial situation. The group of affected workers includes teachers, firefighters, police officers in many states, federal workers under the Civil Service Retirement System, and workers under a foreign social security system. Their proportion of the population is projected to increase by 6% to 23%.
Congress is expected to act on shoring up the Social Security programme, given the number of voters who claim Social Security. The main ways to solve Social Security's financial issues are to cut benefits or raise taxes. The current cap on taxable income is $176,100 (in 2025). Congress could raise the cap on taxes levied on a worker's income to cover the shortfall or increase taxes on the wealthiest Americans.
Revenue from Social Security's payroll taxes will not be sufficient to cover projected future benefits. Last year's trustees report indicated that Social Security's reserves will be depleted by 2035, at which point revenue generated from Social Security taxes would be enough to cover only 83% of scheduled benefits. This year's report suggests an expedited timeline, with the trust funds expected to be depleted by 2034.
In conclusion, the main policy levers involve raising revenues (through payroll tax adjustments), reducing benefits, or a combination of both to restore solvency and protect the program’s future. The Social Security Fairness Act has eliminated the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), provisions that reduced or eliminated benefits for some federal and state workers.
- Given the depletion of the Social Security trust funds by 2034, policymakers may consider expanding the taxable income base to include higher earners' full income, thereby reducing the Social Security deficit significantly and extending the program's solvency without affecting lower- and middle-income workers.
- To address the impending insolvency of the Social Security programme, another option under consideration is raising the Social Security payroll tax rate on workers and employers to generate additional revenue.
- Personal-finance experts and policymakers recommend a combination of tax increases and benefit adjustments to secure Social Security's long-term financial balance, especially as the population of Americans age 65 and older is projected to experience a significant increase by 2050, relying heavily on Social Security benefits as their primary source of income.
