The Cost of Doing Nothing About Social Security
Last Updated November 27, 2024
About 40 years ago, significant reforms were enacted to Social Security to shore up the program and ensure the sustainability of its essential retirement benefits for millions of Americans. Unfortunately, the need for reform has arisen again.
In less than 10 years, Social Security’s Old Age and Survivors Insurance (OASI) Trust Fund is likely to be depleted, at which point, all beneficiaries would see a significant cut in payments. What’s worse, that significant cut would disproportionally affect the nation's most vulnerable recipients. Any change to Social Security will impact how Americans approach retirement decisions, but the costliest choice would be doing nothing.
Depletion of the OASI Trust Fund and Automatic Cuts
By law, Social Security can only pay retirement benefits to the extent that the balance in the trust fund is positive. In 2023, the income of the program covered about 89 percent of the benefits paid, while the trust funds’ reserves covered the remaining 11 percent. In the years ahead, that reserve balance will dwindle, and the Social Security Board of Trustees anticipates the depletion of the OASI trust fund in 2033. At that point, benefits would be automatically reduced to match incoming revenues, equal to a 21 percent reduction in payments to all 70 million individuals who would qualify for OASI. The Trustees project that benefits over the rest of the 75-year projection period would represent about 73 percent of the amount scheduled under current law.
What will this cut mean for Americans? Consider two examples:
- A dual-income couple of 58-year-olds who intend to work until 2033, the year they would each reach full retirement age, are classified as medium-income earners by the Social Security Administration (SSA) because their career-average earnings, which SSA calculates by averaging up to 35 years of an individual’s earnings, were about $64,000 per year in 2022 dollars (the latest year that the SSA indexed wages). If trust fund depletion arrives on schedule, they, as a couple, would see their annual benefits automatically cut by $16,500 relative to scheduled benefits. That would cost the couple almost $280,000 throughout their retirement, assuming an average lifespan.
- If the same couple averaged a wage of around $29,000 a year in 2022 dollars over the course of the 35-year period, which would classify them as low-income earners according to SSA, their benefits would be automatically cut by $10,000 a year. However, that lower cut would be a much larger proportion of retirement income. The SSA estimates that low-income earners receive about 80 percent of their retirement income from Social Security benefits, while medium-earners receive about 60 percent.
Anti-Poverty Effects of Social Security
Social Security is the most effective anti-poverty program in the US. The Center on Budget and Policy Priorities (CBPP) estimates that the OASI program kept more than 16 million Americans out of poverty in 2022; including the Disability Insurance (DI) program, Social Security kept nearly 23 million Americans out of poverty that same year. The CBPP calculates that Social Security alone reduced the poverty rate in 2022 from 18.4 percent to 11.5 percent.
According to a study conducted by researchers at the University of Chicago, Social Security reduced the number of recipients in deep poverty (half of the federal poverty line) by 47 percent and the number of recipients near poverty (150 percent of the federal poverty line) by 20 percent. Additionally, the researchers found that Social Security reduced the poverty rate among households led by a disabled recipient by 36 percent.
The Cost of Inaction
Within the next decade, 70 million Americans will be in the OASI program, yet inaction threatens its viability. According to the recent Trustees report, choosing to stay the course and do nothing to shore up Social Security for another decade would necessitate payroll tax increases or benefit cuts about one-fifth higher than if the Congress acted today. As the depletion of the Trust Fund gets closer, the program will require increasingly large adjustments to maintain scheduled benefits.
Conclusion
With just 9 years to go before benefits are indiscriminately cut, now is the time for lawmakers to take action, shore up the Social Security Trust Fund for the long term, and guarantee the future of the safety net that so many rely upon.
Photo by Joe Raedle/Getty Images
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