As advisors work with clients who rely on Social Security as a crucial component of their retirement income, they must now consider new calculations. According to a nonpartisan Washington think tank, the Committee for a Responsible Federal Budget, if no reforms are implemented and the Social Security trust fund becomes insolvent in 2033 as projected, a 23% reduction in benefits will ensue.
This significant cut would lead to a decrease of $17,400 annually or $1,450 per month in benefits for a recently retired couple with both members having earned average salaries, states the group’s report. Candidates running for the upcoming 2024 presidential campaign face mounting pressure to pledge the preservation of Social Security benefits. However, the think tank points out that such a promise ultimately endorses an implicit endorsement of the 23% across-the-board benefit reduction.
Specifically, the report focuses on the forecast that the Old-Age and Survivors Insurance (OASI) trust fund is swiftly approaching insolvency. In May, the Social Security Administration released a report moving up the projected insolvency date to 2033, one year earlier than previously estimated.
If this insolvency were to occur, the law mandates that the OASI trust fund can only allocate amounts equivalent to incoming trust fund revenue. Consequently, all 70 million retirees, dependents, and survivors, regardless of age, income, or necessity, would experience a 23% reduction in their benefits according to the think tank’s report.
The Impact of Benefit Cuts on Social Security
The future of Social Security is uncertain, with the system facing financial challenges due to a growing imbalance between the revenue it collects and the benefits it owes retirees. In response, the American Institute of Economic Research has conducted a study to determine how benefit cuts would affect different income groups.
According to the study, the extent of benefit cuts would vary among income groups. For a typical retired couple relying on a single income, an immediate cut of $13,100 per year would be expected. Dual-income couples at the lower end of the income range would face a cut of $10,600 in annual benefits, while those at the high end of the spectrum could see a loss of $23,000 in annual benefits.
The Need for Reform
Social Security has been relying on its reserves to cover the shortfall between revenue and benefits. However, these reserves are projected to run out within the next decade. To address this issue, Congress must take action to reform the system.
Limited Political Will for Reform
Despite the pressing need for reform, there has been limited political appetite to make changes to Social Security. The system last underwent a major overhaul in 1983, and since then, there has been resistance to further reforms.
Strain on the System
The AARP and other organizations have highlighted that Social Security is strained due to predictable demographic changes. The retirement of the baby boomer generation and increasing life expectancy have put additional pressure on the system.
Options for Congress
While there are factors beyond direct control that influence Social Security, such as the economy, wages, life expectancy, and birth rates, potential solutions are relatively straightforward. According to the AARP, Congress will need to consider raising taxes, modifying benefits, or implementing a combination of both.