Recently, attention has been drawn to the Social Security cost-of-living adjustment (COLA) for 2025 and its influence on payments in the coming year. Benefit payments will increase beginning in January, but the exact percentage will not be known until the COLA is published on October 10th.
The adjustment will provide short-term financial comfort to retirees, but there are long-term concerns for those who expect to receive payments for another decade or more, particularly given recent estimates about Social Security’s future.
Social Security Faces Insolvency Within a Decade
Since 2021, Social Security has spent more than it collected, and this tendency is anticipated to continue. The program has managed to close the gap by depending on its trust funds, which still have excess cash. However, these funds are not unlimited.
According to a September analysis from the Congressional Budget Office (CBO), the Old Age and Survivors Insurance (OASI) trust fund, which pays retirement and survivors benefits, is expected to run out of money by 2033. Meanwhile, the disability insurance trust fund is expected to last until 2064.
If the two trust funds were combined as one of the conceivable ways to extend the life of the OASI fund, they would both be depleted by 2034. This is partly attributable to the Social Security Administration providing far more retirement and survivor payments than disability benefits.
If no action is taken by the government, recipients’ benefits may be lowered by 23% beginning in 2035, with an additional 5% drop gradually enforced by 2098, after which benefits will stabilize.
Such changes would be terrible for millions of seniors, particularly those who do not have adequate personal savings or any reliable source of income.
To put this into context, a 23% cut would reduce the current average monthly retirement benefit of $1,920 (as of August) to $1,478, a drop of around $5,300 per year. For many retirees, this could result in a severe decrease in their quality of life.
Potential Solutions
On the plus side, the government is unlikely to allow such a significant drop in payments to occur. Social Security has previously encountered financial challenges, most notably in the 1980s, when modifications were implemented that allowed the program to essentially maintain its benefit structure. However, there were trade-offs to these adjustments.
During that time, there were several significant changes:
– Raising the Full Retirement Age (FRA): The FRA is the age at which a recipient can receive their full retirement benefit based on their employment history. Early claims are permissible, although they result in lower monthly payouts. Raising the FRA meant that younger claimants risked harsher fines if they elected to begin benefits at the same age as previous generations.
– Raising the Social Security Payroll Tax: All workers must pay a Social Security tax on their earnings up to an inflation-adjusted cap (fixed at $168,600 in 2024). This tax rate is now 12.4%, split equally between employers and employees. Raising this tax reduced workers’ take-home earnings each year.
– Taxation of Some Social Security Benefits: Certain retirees must pay taxes on their Social Security benefits if their provisional income—the sum of their adjusted gross income (AGI), nontaxable investment interest, and half of their Social Security benefits—exceeds $25,000 for individuals or $32,000 for married couples. This tax obligation decreased some retirees’ ability to afford their living expenditures.
These initiatives are comparable to the proposals being considered to solve the existing shortage. However, no apparent remedy has been presented. According to the CBO assessment, a 4.3% rise in payroll taxes or a permanent 24% drop in benefits is required to adequately address the financial difficulties. Given the considerable economic repercussions of these possibilities, any eventual method is likely to incorporate a variety of strategies.
For example, payroll taxes might be raised somewhat, as well as greater taxes on retiree Social Security benefits. This balanced strategy would share the load more evenly among diverse groups, rather than putting all of the financial strain on one part of the community.