According to projections from the Congressional Budget Office (CBO), this potential reduction could be particularly harsh for Americans born after 1970.
Social Security is at risk of facing a severe funding shortfall in the near future, which could lead to a substantial reduction in benefits for retirees within a decade
The impending shortfall is linked to the depletion of Social Security’s Old Age and Survivors Insurance (OASI) Trust Fund, expected by the CBO to occur in fiscal year 2033. Once the OASI fund runs dry, Social Security will have to rely solely on payroll tax revenues, which currently cover only about three-quarters of current benefits. The CBO forecasts a significant 25% reduction in Social Security benefits starting in fiscal year 2034, with a further 30% reduction by 2097.
These Social Security benefit cuts will impact different generations differently. Older retirees will experience milder effects compared to younger ones. For instance, the CBO predicts that the initial impact of benefit cuts will be felt by individuals born after 1968, especially those turning 65 in 2033. Meanwhile, those born in the 1950s will face a collective 9% reduction over their lifetimes, whereas those born in the 1970s will confront a 25% reduction.
The Committee for a Responsible Federal Budget (CRFB) further clarifies the impact of these cuts
When the OASI fund becomes insolvent, annual benefits for a typical newly retired dual-income couple could be slashed by $17,400, based on a 23% cut in benefits. For single-income couples, the immediate reduction may reach $13,000 annually, with variations depending on income.
However, there is room for action to alleviate this impending crisis. One potential solution is injecting more revenue into the program, possibly by raising the income threshold on wages subject to Social Security payroll taxes. Currently, the tax is levied at 6.2% of wages, with earnings above $160,200 exempt. Raising this cap to $250,000 or eliminating it entirely could bolster trust fund reserves and ensure the program’s long-term sustainability beyond the next decade. The fate of Social Security remains uncertain, but addressing this issue promptly is crucial to safeguard the financial well-being of retirees.
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