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By  Vincent Birardi, CFP®, AIF® 


You’ve likely read quite a few headlines about Social Security running out of money in the next decade. We cover this topic pretty often at Money, so when a reader reached out for more information about Social Security’s funding issues, I was excited to dig in.

Janice, 61, a retiree from Massachusetts who plans to claim Social Security at 67, asks: “I read frequently about the expected shortfall in roughly 10 years. What is the root cause of this shortfall?”

I’m glad you asked, Janice. Prior to Social Security retirement benefits, state welfare programs that provided various kinds of old-age pensions were the primary system of financial support for older people. These programs required proof of financial need, and the most generous plan paid up to $1 a day, according to the Social Security Administration.

You can probably imagine, then, that President Franklin D. Roosevelt’s proposal for a contributory form of social insurance for older Americans was a pretty innovative idea. To fund the program, employers and workers today each pay 6.2% of wages up to the taxable maximum, which is $168,600 as of 2024. (Self-employed workers pay 12.4%.)

But there’s a problem that’s been growing in the background for decades. Americans are living a lot longer these days  — the average lifespan for both sexes is about 77, compared to 58 in 1935. As baby boomers start retiring in greater numbers over the next decade, current payroll taxes won’t be able to fully cover the Social Security benefits being distributed.

Social Security retirement benefits are financed through the Old-Age and Survivors Insurance trust fund. The program can only spend what it receives in tax revenues, plus what has accrued in the trust fund from previous surpluses and interest earnings. That means unless Congress agrees on a solution, Social Security recipients are likely to see a universal benefits reduction of about 23% in 2034.

Ten years may sound like a long time, but it’s not going to be easy to fix Social Security’s looming insolvency crisis, says Vincent Birardi, a wealth advisor at Halbert Hargrove.

While the program isn’t going to disappear entirely or go “bankrupt” — a common misconception — politicians and voters will have to make compromises to protect benefits. There are a few solutions, or a combination of solutions, that will need to be put into motion to avoid insolvency. Congress can increase payroll taxes, including raising the annual wage cap or even eliminating it entirely. It can also reduce the benefits that recipients get or gradually increase the retirement age for receiving full benefits.

The latter happened the last time insolvency was imminent in 1983, leading Congress to pass a decades-long shift to increase the full retirement age to 67. Birardi says that additional age increases are likely to occur at various times in the future, assuming that the average life expectancy continues to increase.

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