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Understanding the Future of Social Security: How Solvency Issues Could Affect Your Finances

Understanding Social Security Funds

There are two primary trust funds associated with the Social Security program:

  • The Social Security Old-Age and Survivors Insurance (OASI) Trust Fund: This fund pays the traditional benefits known as Social Security.

  • The Disability Insurance (SSDI) Trust Fund: This fund supports individuals who are unable to work due to disability.

Funding of the System

The Trust Funds are primarily funded through payroll tax contributions, with additional income from the taxation of benefits and interest. In 2023, the total income for Social Security was $1,350.7 billion, while total costs amounted to $1,379.3 billion. At the end of 2023, the assets in the trust funds were $2,788.8 billion.


Calculation of Benefits

Social Security benefits are calculated based on an "index" of earnings to reflect changes in general wage levels over a worker's career.  Up to 35 years of earnings are used to compute the Average Indexed Monthly Earnings (AIME).  The years with the highest indexed earnings are summed and divided by the total number of months in those years.  The Primary Insurance Amount (PIA) is then calculated using a formula applied to the AIME.  This formula involves three calculations:


  1. 90% of the first $1,174 of AIME,

  2. 32% of the AIME over $1,174 up to $7,078,

  3. 15% of the AIME over $7,078.


The two numbers of $1,174 and $7,078 are called bend points and are adjusted annually based on average wage indices.


Social Security Recipients

Approximately 67 million people receive Social Security benefits.  Of these, around 52 million are retired workers or their spouses.  The average monthly benefit for retired workers is $1,905.  Among beneficiaries aged 65 and older, 12% of men and 15% of women depend on Social Security for 90% or more of their income.


Life Expectancy Trends

In 1940, a 65-year-old could expect to live almost 14 more years.  Today, that number has increased to over 20 years.  The number of Americans aged 65 and older is projected to rise from about 58 million in 2022 to approximately 75 million by 2035.


Solvency of the Program

There is ongoing discussion about the solvency of the Social Security program.  The financial status of the program changes annually.  According to the 2024 Trustees Report, the Social Security trust fund is projected to be depleted by 2033.  If revenue is reallocated from the Disability Insurance trust fund, the combined trust funds could be insolvent by 2035.  Since 2012, the projected depletion year has ranged between 2033 and 2035.


As the primary source of income for the Social Security fund is payroll taxes, contributions will continue each year.  Thus, solvency does not mean the cessation of payments but indicates that benefits may need to be reduced to align with available funds.  Upon insolvency, it is projected that beneficiaries would receive about 79% of their Social Security benefits, while those receiving Disability Insurance might receive about 83%.


Reforms Required

Current solvency projections assume no changes to the program.  Congress has previously enacted reforms to ensure the program's sustainability with the last reform coming in 1983.  These reforms included taxation on Social Security benefits, increases in payroll tax rates, raising the retirement age, and temporarily postponing cost-of-living adjustments.  These measures were expected to sustain full benefits until 2057.  It is not surprising the forecast was wrong based on the aging Baby Boomers and the lower workforce.


Further reforms may be necessary to extend the solvency date, particularly as Americans live longer.  Possible changes could include increasing payroll taxes and raising the full retirement age.


Overall, the solvency of Social Security is critical in proper planning for your future. The impact goes further than the potential benefits received in the future. It impacts business owners and those who are working today. A reform which could increase payroll taxes could increase expenses for businesses and reduce net income for workers.


Stay tuned as we approach the solvency year and what actions Congress may take.

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