You hear it a lot: Social Security may soon go bankrupt.
But how likely is that to happen and what would it mean for retirees?
“Social Security is too ingrained within our culture and retirement planning to disappear entirely,” said Josh Radman, founder of Denver-based Presidio Advisors, in an email.
“There may be benefit cuts to help shore up the system down the road, but there are also numerous ways to strengthen the long-term viability of the system,” he added.
[Read: How to Apply for Social Security.]
A Lifeline for Many Seniors
Nearly 68 million Americans receive a monthly Social Security benefit. These benefits add up to around $1.5 trillion in benefits paid annually.
For most Americans over age 65, Social Security is a major source of income, as indicated by data from the Social Security Administration:
— Nearly 90% of people age 65 and older were receiving a Social Security benefit as of June 30, 2024.
— Social Security benefits account for about 30% of the income of people over age 65.
— Among Social Security recipients age 65 and older, 37% of men and 42% of women receive 50% or more of their income from Social Security.
— Among Social Security beneficiaries age 65 and older, 12% of men and 15% of women rely on Social Security for 90% or more of their income.
Will Future Benefits be Reduced?
There has never been a case where Social Security benefits were slashed for people already receiving them, and payments have never been delayed.
However, to maintain solvency, Congress made major changes in 1983, raising the full retirement age for people born in 1960 or later to 67.
“Future benefits could be reduced by as much as 25% or more,” said Gary Knode, a certified financial fiduciary and president of Safe Harbor Wealth in Summerville, South Carolina, in an email.
[READ: Frequently Asked Social Security Benefit Questions.]
What’s the Real Risk of Bankruptcy?
It’s important to note the distinction between solvency and bankruptcy. Congress oversees amendments to the program and is responsible for ensuring solvency. Social Security insolvency would mean the fund could not fully pay scheduled benefits, while bankruptcy would mean a complete inability to meet obligations.
In its 2024 annual report, the Social Security Board of Trustees said the Old-Age and Survivors Insurance Trust Fund, or OASI, will be able to pay 100% of total scheduled retirement benefits until 2033. That’s unchanged from last year’s report.
After that, the fund’s reserves will be depleted and continuing program income will be able to pay 79% of scheduled benefits. That’s down 1% from the 2023 report.
That’s not the same as going bankrupt since the program would continue receiving income from taxpayers.
“Social Security cannot go bankrupt. Ever. If bankruptcy means that the program will run out of money, it is not possible,” said Martha Shedden, president of the National Association of Registered Social Security Analysts, based in Melville, New York, in an email.
“Retirees are being paid partially right now using a surplus of trust funds that have been built up since the 1983 amendments,” she said, adding that the surplus is what the Social Security Administration says will run out in the next decade or so.
“However, the program is a pay-as-you-go system with workers paying in what is needed for retirees to be paid their benefits,” Shedden said. “There will still always be workers paying into the system, but there are not enough workers per retiree, meaning that the payments will not be enough to fund 100% of retiree benefits as the laws and rules are now written.”
Shedden added that the rules must be adjusted to provide a long-term balance between income going into the trust funds and payments going out.
Can Social Security Avoid Benefit Cuts?
In 2023, the Social Security Administration released a summary of provisions to change the program. Potential changes include taxing high earners more, raising the full retirement age, decreasing the cost of living adjustment or raising the Social Security tax across the board.
Congress is aware of the looming shortfall, and the House Ways and Means Subcommittee on Social Security has been studying the matter.
However, it may take some time before Congress acts.
“What stands out is that many of these proposals are relatively modest in scope and size of change,” Radman said.
“Of course, any discussion around much-need changes is political suicide, so no politician will voluntarily put their neck out on the line before it becomes unavoidable,” he added. “In short, we will likely not see any concrete action until the 11th hour.”
[READ: What Will the Social Security COLA Raise Be for 2025?]
How Much Would Future Benefits Be Cut?
If Congress doesn’t act, program income won’t be enough to pay benefits beginning in 2034.
According to the nonpartisan think tank Committee for a Responsible Federal Budget, annual benefits for the average newly retired dual-income couple would be slashed by $17,400 annually in 2023 dollars.
A dual-income couple categorized as lower earners would see their benefit cut by $10,600, while a higher-earning dual-income couple’s benefit would be cut by $23,000.
Shedden said the real risk of benefits being reduced for those already receiving Social Security in 2034 is very low.
“However, the longer Congress takes to adjust the rules, the more severe and sudden the changes may need to be to prevent a reduction of benefits,” she said, adding that support for the program is high among all ages, political parties and demographics.
What Pre-Retirees Can Do Now
The real concern for retirees, said Knode, is a widespread lack of preparedness. He suggests stashing savings, even if Social Security isn’t likely to go under.
“Plan ahead and don’t expect the government to be there for you,” he said. “Sounds dire, but we should plan for the worst.”
That means saving as much as possible.
“Working more at your current job or picking up a side gig is a great idea for increasing your cash flow to help supplement your savings,” he said.
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Here’s How Much Money You Could Lose if Social Security Goes Bankrupt originally appeared on usnews.com
Update 09/26/24: This story was published at an earlier date and has been updated with new information.
