The 2020 annual report of the Social Security Board of Trustees estimated that the Social Security trust fund will be depleted in 2035 if no changes are implemented prior to that time. In that case, the only sources to cover benefits would be payroll taxes and income taxes that Social Security recipients pay on their benefits, together estimated to cover about 78% of Social Security benefit payments. A recent forecast from the Congressional Budget Office estimates that, due to the impact of COVID-19, the trust fund will be depleted in 2031 if no action is taken prior to that time.
The Social Security Administration has outlined a broad range of policy options that would address trust fund solvency. These include reducing the cost-of-living adjustment, gradually raising the full retirement age, raising the earliest date that benefits can be received, raising the Social Security payroll tax that employers and employees pay, and/or increasing the level of wages on which the payroll tax is applied.
Despite this being a well-known issue for many years, there hasn’t been political will to take any action. We believe there is a high probability that some combination of the above-mentioned actions will be taken prior to 2031, as the issue becomes increasingly pressing. It seems unlikely that placing the burden on current seniors would be politically acceptable. The more likely scenario is some combination of extending the full retirement age (as was done previously without impacting those close to retirement age), increasing the payroll tax and reducing cost-of-living adjustments.
In our financial planning projections, we often will include measures of conservativism, such as reducing or eliminating the cost-of-living adjustments, or reducing the amount of calculated benefit a client is expected to receive. We encourage clients to contact us with questions about Social Security’s impact on their financial plans.