A recently released report by the boards of Social Security and Medicare confirmed last year's findings that a key trust fund will be depleted in 2033.
But that doesn't mean benefit reductions are inevitable. In fact, Treasury Secretary Janet Yellen and other officials emphasized that point in a message to the public associated with the report.
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“Legislators have many options to make changes that would reduce or eliminate long-term financial shortfalls,” officials say. wrote. “Taking action sooner rather than later will allow a broader range of solutions to be considered and provide more time to gradually implement changes so that the public has adequate time to prepare.”
To clarify, according to the Social Security Administration, solvency refers to the trust funds' ability to pay 100 percent of currently scheduled benefits.
One of those funds, the Old-Age and Survivors Insurance (OASI) trust fund, will be depleted in 2033.
However, there are two main reasons not to panic. The first has to do with the point Yellen and the other officials made: There are changes to the system that lawmakers can make to resolve the situation.
Second, it is important to note that depleting the trust fund does not equal the end of Social Security benefits. Trustees estimated that continued funding from payroll taxes could still pay 79% of scheduled benefits.
And, of course, there are other considerations as well.
For Social Security, there is time to avoid benefit reductions
A possible short-term solution, which would require a change in the law, would be to combine the OASI with the Disability Insurance (DI) trust fund.
Combining the OASI and DI projections (referred to as OASDI), as estimated by the trustees, would result in the ability to pay all scheduled benefits through 2035 (one year longer than estimates in last year's report). After that, 83% of the benefits could be paid through continued income.
Employment data played a role in the OASDI fund's longevity projections.
“The trustees noted that the long-term finances of the OASDI pooled fund improved this year thanks to an upward revision to labor productivity (due to stronger-than-expected economic growth in 2023) and a long-term disability incidence rate “lowest assumption.” wrote Kitces.com on May 10. “Although these were partially offset by a decline in the assumed long-term total fertility rate (which would lead to fewer workers contributing to the Social Security system).”
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Many potential actions are proposed to shore up Social Security
However, those factors will only be relevant for the next decade or so. Other longer-term solutions are possible, with legislative intervention.
These include an increase in the payroll tax, an increase in the retirement age and a change in the way benefits are calculated.
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A useful report from the Social Security Administration, titled “Summary of provisions that would change the social security program,” contains summaries of possible actions that could be taken, along with the resulting financial effects.
“Many policymakers have developed proposals and options to address this long-term deficit,” the summary states. “This booklet provides a broad range of policy options addressing trust fund solvency and other issues related to Social Security benefits and financing. Many of these individual provisions were part of comprehensive proposals aimed at restoring trust fund solvency. trust funds”.
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