July 4, 2022

The financial report for the Social Security program was released recently and the results are grim.

The purpose of the report is to communicate the financial condition of the Social Security system over the next 75 years. The report is aimed at Congress, which can make changes to the program as needed.

The latest edition identified “a 75-year actuarial deficit,” which isn’t a strong endorsement of the future. So, how does this get fixed?

First, by raising tax revenues. The trustees identified a need for a permanent increase in the payroll tax rate to 15.64% (from 12.4%), starting in January 2022.

A second solution is to cut benefits. The report suggested a permanent benefit cut of 20.3% for all beneficiaries, or 24.1% for those becoming eligible starting in January 2022.

Of course, both solutions could be enacted together. There could also be some other combination of revenue generation and cost cutting. But, realize that most reform pleas are ignored by Congress, despite the implied urgency.

Under current projections, the trust fund will exhaust in 2035, after which payroll tax revenues will be able to pay 80% of promised benefits. If Congress waits until 2035 to enact changes, the payroll tax rate would have to rise to 16.47% or benefits would have to be cut by 24.9%.

The trustees recommend lawmakers act in a timely manner to phase in any necessary changes, but that doesn’t mean they will. See, there are multiple terms between now and 2035. So, I wouldn’t be surprised if this is ignored until then.

The key takeaway is don’t let solvency concerns dictate your Social Security strategy. After all, 80% of a higher benefit claimed at age 70 is still more than 80% of a lower benefit claimed at age 62.