Social Security recipients will receive a 2.5 percent cost of living adjustment (COLA) in January. That's not much to help seniors keep pace with rising prices, but it's enough to tax the already strained trusts that fund the system.
Social Security's Old Age and Survivors Insurance (OASI) Trust Fund is expected to run out of money by 2034.according to the Congressional Budget Office (CBO). That would result in a 23 percent reduction in benefits.
The Disability Insurance (DI) Trust, which pays benefits to disabled workers and their families, is expected to be debt-free by 2064.
Why Social Security is Running Out of Money
Spending more than you bring in is not a sustainable financial plan. And that's what social security does. This program pays 68 million beneficiaries in addition to collecting tax and interest.
This year, OSAI and DI trusts will deliver just over $1.381 trillion in revenue. However, the benefits paid will reach just over $1.482 trillion for both programs. That's a negative difference of over $100 billion.
There are several reasons for the shortfall in Social Security.
The population is aging. More people are living longer and fewer people of working age are contributing to the system. Most Americans 65 and older will know increase from 61 million in 2023 to about 77 million in 2035.
In 1960, there were 5.1 workers paying into Social Security for every beneficiary. However, the ratio is gradually decreasing. In 2023 there were 2.7 workers per beneficiary. That figure is expected to drop to 2.4 workers for each beneficiary by 2035.
In addition, the current Social Security tax rate of 12.4 percent (6.2 percent each for employees and employers) has not been increased since 1990. On top of that, high earners do not pay Social Security taxes on earnings above $168,600.
The Impact of Elections on Public Safety
A commitment to protecting public safety is always a cornerstone of any presidential campaign and this year is no different. Most candidates make a promise but provide few details on how to do so. Again, this year is not the same.
Trump's influence
Former president Donald Trump has proposed imposing tariffs on almost any nation that imports goods from the United States. He often says that the money he expects from that program will cover all government expenses. However, many economists disagree tariffs will increase the cost of goods for American consumers.
Last week the Committee on a Responsible Federal Budget (CRFB) released a report analysis of the impact of Trump's proposals on Social Security. The results were not promising.
The CRFB determined that Trump's proposals would reduce Social Security funding by $2.3 trillion by 2035. That would mean the trust fund would run out of money in 2031 – three years earlier than currently projected.
For retirees, Trump's policy will result in a 33 percent cut in benefits instead of the previous forecast of 23 percent.
Some Trump proposals cited as damaging to Social Security's financial health include:
- Eliminating taxes on Social Security benefits. This will eliminate the program's source of income.
- Eliminate all overtime taxes and tips. Some of those taxes help fund Social Security.
- Costs. The increased cost of consumer goods may stimulate inflation or reduce payments, resulting in a loss of tax revenue.
- Deportation of immigrants. A hallmark of Trump's campaigns has been calls for an immigration ban. The CRFB says deportations will reduce the number of immigrants paying Social Security trust funds.
The CRFB analysis is the latest to raise the alarm about Trump's plans.
However, it is not the only one.
The Tax Foundation has determined that the former president's plans to eliminate Social Security taxes reduce system revenue by about $1.6 trillion from 2025 to 2034.
Harris's influence
Both as a candidate and as office bearer, Vice President Kamala Harris has voiced her support for Public Safety. In fact, his record shows advocating for expanding the program and tapping higher revenues to cover costs.
“You will strengthen Social Security and Medicare for the long term by making millionaires and billionaires pay their share of taxes,” Harris campaign says.
He supports a $168,600 increase in Social Security taxable income.
As a congressman, Harris co-sponsored the Social Security Expansion Act which proposed changing the COLA formula to more accurately reflect the impact of inflation on seniors. Many advocacy groups for the elderly have long supported such a change.
“This year represents another missed opportunity to provide seniors with the financial assistance they deserve by changing the COLA calculation,” Senior Citizens League Director Shannon Benton said of this year's COLA announcement.
The Social Security Expansion Act also allowed for aggressive payroll tax collection to help pay for the expansion.
As vice president, Harris supported President Joe Biden's proposal to increase income for high earners.
Social Security Reform Methods
Conventional wisdom holds that there are only a few ways to make Social Security solvent in the long run. You can raise taxes; reduce benefits or combine the two. However, few members of Congress are willing to risk their careers by doing any of those things.
President Ronald Reagan approved a reform plan that cut benefits and introduced a Social Security income tax for the first time. He also gradually raised the age of full benefits from 65 to 67.
When Reagan established his Social Security Commission headed by Alan Greenspan, another idea emerged. That idea was to put some Social Security funds into private investments like the stock market.
Investments will be made by individuals in individual retirement accounts or by the Social Security Administration. The problem with that view is market risk.
Another solution calls for the introduction of wealth testing. The idea would cut benefits for retirees with incomes above a certain amount — say, $50,000 a year. This will change the system from one that benefits everyone to one that is targeted at those in greatest need.
However, one idea that may be more politically sound for Congress is to add the Social Security deficit to the national debt. This would include trusts borrowing from the government or the government giving money to the trusts. That would effectively solve the Social Security problem, but it would add to the national debt problem.
In the words of the late Senator Evert Dirksen, “A billion here, a billion there and pretty soon you're talking real money.”
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