The future of Social Security remains uncertain, forcing people to ask questions like, “Will Social Security run out?” or “Why is Social Security in trouble all the time if everyone pays into it?” Well, part of the problem can be attributed to longer life expectancies, a smaller working-age population and an increase in retirees.
Learn More: 3 Little-Known Social Security Rules That Could Save You Thousands
Consider This: How Far $750K Plus Social Security Goes in Retirement in Every US Region
By 2035, the number of Americans 65 and older will increase to more than 78 million from about 58 million today. As a result, more people will be taking money out of the Social Security system, but fewer will be paying in. That doesn’t mean the program will run out of money entirely, though. Payroll taxes are expected to cover about 78% of scheduled benefits.
However, if the funding gap isn’t filled, retirees could get lower Social Security payments or workers might need to pay more into the system. If no changes are made, this is what Social Security could look like in the future.
The Worst-Case Scenario: Benefits Could Be Cut
If you plan to rely on the program in 2035, keep in mind there’s a chance you could receive less in Social Security benefits than you might have expected. If no changes are made to deal with the trust fund shortfall, benefits will have to be reduced by upwards of 25%.
For many retired adults, that kind of benefit cut would represent a big financial hit. Social Security provides at least half of the income for 50% of elderly married couples and 70% of elderly single people, according to the Social Security Administration.
Read Next: Social Security’s Biggest Lie: Why ‘Full Retirement Age’ Isn’t What You Think
Is It Likely That Benefits Will Be Cut?
There is no way around a change that will surely ruffle some feathers and make a big slash in Social Security benefits is forthcoming. Though there have been no homerun suggestions yet, it’s clear that there is no way to make everyone happy.
Many experts think Congress will step in before 2035 to prevent such a deep cut in benefits. Policymakers seem to agree that something needs to be done, but they disagree on how. Proposed bipartisan solutions include everything from tax increases to benefit adjustments that will automatically be formulated based on life expectancy.
Ways To Balance Social Security’s Budget
Even though Social Security isn’t expected to run out of money until 2034-35, several options for changes have already been floated to deal with the budget shortfall. These options include:
- Raising the payroll tax rate
- Increasing the wages subject to Social Security taxes
- Raising the full retirement age (FRA)
- Reducing the annual cost-of-living adjustments (COLA)
- Cutting benefits
Read on to learn more about the details of each of those proposals and how they would affect Social Security if implemented.
The Social Security Payroll Tax Rate Could Rise
If benefits aren’t cut, tax revenue for the program will likely have to increase. One way to do that is to increase the payroll tax rate. Social Security is funded through a 6.2% payroll tax that workers pay, plus another 6.2% that employers pay (self-employed people have to pay the full 12.4%).
So, as the trust fund reserves dwindle, the payroll tax would need to increase enough to sustain the program. If nothing is done until 2034 or 2035, that increase would need to be sharper. However, this is one unpopular option as no one wants a tax increase, yet everyone wants a bigger Social Security check.
However, an increase in the payroll tax rate could take different forms. Currently, the total payroll tax is allocated equally between the employee and the employer. The tax increase could be allocated equally among employers and employees or allocated more to the employer to hide the tax hike from taxpayers.
More Wages Could Be Taxed
Another option to increase tax revenue to fund Social Security is to raise the amount of earnings subject to taxation. Only the amount of wages up to the Social Security contribution and benefit base is subject to Social Security taxes.
To help the trust fund remain solvent, the taxable wage limit would have to be even higher — or lifted entirely — so that all income would be subject to the payroll tax. This change would affect high-income people, as in 2025, the maximum taxable income for Social Security taxes is $176,100, so anything over this threshold can currently escape taxation for Social Security.
Raising the taxable wage limit would only affect people whose wages exceed the current contribution and benefit base. For example, if you make $80,000 per year, you pay Social Security taxes on all of your income, so whether the limit is $180,000, $300,000 or removed entirely, it doesn’t affect your payroll taxes.
The FRA Could Increase
Because tax hikes aren’t popular, it’s more likely that Congress will raise the FRA for Social Security benefits. This option is also not very popular, but it’s more well-received than higher taxes. That means younger generations will have to work longer before they can start collecting benefits. Currently, the age at which you can collect full retirement benefits is 67 for most younger people in the workforce.
There are always a few proposals to raise the FRA gradually to 69 — that would keep more money in the trust funds. At the same time, it might eliminate a popular strategy that retirees use to maximize Social Security income. Currently, if you delay collecting retirement benefits past your FRA, your benefit increases each year you wait until age 70.
As life expectancy increases, raising the retirement age might seem like a reasonable response because people have longer to work. However, raising the retirement age essentially cuts benefits because it delays the payments of benefits that people are expecting.
In addition, the overall longevity increases haven’t applied to many low-income workers, who have shorter life expectancies than wealthy people. People with low incomes would likely be the hardest hit by increasing the retirement age.
The Social Security COLA Could Be Reduced
Retirees receiving Social Security benefits typically see their checks increase slightly most years to keep pace with inflation. These cost-of-living adjustments — or COLAs — are based on the consumer price index.
To keep the Social Security trust funds solvent, there could be changes to cost-of-living adjustments. However, the formula most likely wouldn’t change for people born before 1960, but people born after 1960 might see a reduced COLA.
If that happens, benefit checks will not keep pace with inflation. People who rely heavily on Social Security might have to find ways to reduce spending to make ends meet.
Caitlyn Moorhead, Joel Anderson, Michael Keenan and Gabrielle Olya contributed to the reporting for this article.
More From GOBankingRates
- 5 Old Navy Items Retirees Need To Buy Ahead of Fall
- I Paid Off $40,000 in 7 Months Doing These 5 Things
- 6 Popular SUVs That Aren't Worth the Cost -- and 6 Affordable Alternatives
- Warren Buffett: 10 Things Poor People Waste Money On
This article originally appeared on GOBankingRates.com: What Social Security Could Look Like in 2035
