Congress Has Six Years to Save Social Security: Here’s What’s at Stake

Quick Read

• Social Security’s OASI Trust Fund faces depletion by 2032, potentially triggering a 22% across-the-board benefit cut without Congressional action.

• A shrinking worker-to-beneficiary ratio, now 2.9 to 1 compared to 5 to 1 in 1960, has been driven by longer lifespans and declining birth rates and is straining Social Security finances.

• Congress can raise payroll taxes, lift the $184,500 wage cap, or gradually increase the retirement age, but delays make each fix harder to implement.

• Two retirees, same $1 million, same 4% rule, buy one finished with $1.4 million, the other hit $0 in 12 years. Our free reader guide explains the flaw that separated them, and the income-first method built to avoid it.

There are rumors that Social Security is about to run out of money. That’s not true, so there’s no need to start panicking about not getting a monthly benefit at all.  

But Social Security is facing a serious financial challenge that lawmakers must address. The program’s Old-Age and Survivors Insurance (OASI) Trust Fund is expected to be depleted in 2032. At that point, benefit cuts may be inevitable if Congress doesn’t step in with a fix.

A 22% benefit cut could be coming

The OASI Trust Fund is the part of Social Security that pays retirement and survivor benefits. The trust fund has been used to help cover the gap between the benefits promised to retirees and the revenue coming in from payroll taxes.

If the fund runs out of reserves and Congress doesn’t make changes, Social Security can still collect payroll taxes from workers. However, those incoming taxes will only be enough to pay a portion of scheduled benefits.

Why the current crunch? It largely boils down to a changing worker-to-beneficiary ratio.

Back in 1960, the ratio of workers to Social Security recipients was 5-to-1. Now, it’s 2.9-1, according to the Bipartisan Policy Center. And it’s projected to fall further, dropping down to just 2.2-1 by the 2070s.

The 4% Rule is Broken, Built On A World That No Longer Exists

Every retiree knows about the 4% rule, but it frames retirement as a slow liquidation and still causes retirees with seven-figure accounts to agonize over a dinner out.

There’s a different way to run the math that makes more sense today. Build an income floor — dividends, interest, and Social Security that cover your essential bills every month — and you never have to sell shares into a down market just to pay them.

Our free reader guide, The 4% Rule Is Broken, walks through it in about 15 minutes. Access the report here.

To be clear, it’s not just the fact that baby boomers are retiring in droves that’s driving this disconnect. Not only have life expectancies increased through the years, but birth rates have declined. That combination puts tons of pressure on Social Security.

The Social Security Trustees estimate that without legislative action, benefits could face an across-the-board reduction of roughly 22%. That means a retiree expecting a $2,000 monthly Social Security check could see that payment reduced by about $440 per month.

While a cut of that size would affect beneficiaries across the board, it could be especially painful for older Americans who rely on Social Security as their primary source of income.

For many retirees, Social Security is more than just a supplement to retirement savings. Many Americans enter retirement with limited savings (sometimes no savings) and no employer pension. Losing any portion of those benefits could be catastrophic when they’re the main or only source of income.

Congress has several options to strengthen Social Security

The good news is that Social Security’s challenges are not unsolvable. Lawmakers have several potential tools they can use to improve the program’s finances, though each option comes with trade-offs.

One possibility is increasing the payroll tax rate. Currently, employees pay 6.2% of their wages into Social Security, and employers pay another 6.2%, for a combined contribution of 12.4%. Raising that rate would bring more money into the program and could help close the funding gap.

Another option is lifting the wage cap on Social Security taxes. Currently, workers only pay Social Security payroll taxes on income up to a certain annual limit (currently $184,500). Increasing or eliminating that cap would require higher earners to contribute Social Security taxes on more of their income, generating additional revenue for the program.

Congress could also consider gradually raising Social Security’s full retirement age, which is when retirees can claim their benefits without a reduction. Raising that age could reduce costs over time.

The longer lawmakers wait, the harder the fix becomes

Social Security’s funding problems aren’t new. And the fact that lawmakers haven’t acted on them so far is a problem.

At this point, Congress simply can’t afford to put off addressing the issue. Certain changes above — particularly, raising full retirement age — would need to be phased in over time. Waiting until the last minute just isn’t feasible. Even though benefit cuts aren’t on the table for another six years, given that the stakes are high, the decisions that shape Social Security’s future need to happen much sooner.

Before Your Next Withdrawal, Run One Number ( It’s Not The 4% Rule Everyone Knows)

Take your essential monthly expenses and subtract your guaranteed income — Social Security, plus any pension. What’s left is your income gap, and how you close it determines whether retirement runs on share sales or on a paycheck your portfolio writes you every month. Our free reader guide, The 4% Rule Is Broken, shows exactly how to close that gap with portfolio income: a worked example (one retiree needed about $480,000 in income-producing assets to cover his essentials for good), an eight-point conversion checklist, and the 20-year numbers comparing dividends to withdrawals. It’s free and takes about 15 minutes to read. Get the guide here before you take your next withdrawal.

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