Protecting seniors from poverty is not the same as providing six-figure benefits to the highest-income households.
The most recent projections show that the retirement trust fund will run dry in 2032.
T he Social Security Administration has announced a 3.6 percent cost-of-living-adjustment, or COLA, for 2027 — the greatest increase in four years. For the average retiree, that will mean $73 more per month and about $880 more per year, bringing the average retiree’s benefit to approximately $25,300 next calendar year. But a cost-of-insolvency adjustment is on the horizon if Congress refuses to fix Social Security.
Automatic COLAs have been the norm for more than 50 years. But when Social Security’s retirement trust fund runs out of money, as it surely will soon, these annual benefit increases will turn into automatic benefit reductions — unless younger generations are forced to pay about 40 percent more in Social Security taxes.
Based on the most recent projections, the retirement trust fund will run dry in the fourth quarter of 2032. Federal law prohibits Social Security from paying more in benefits than it has in revenues plus trust-fund reserves. When the trust fund runs out, incoming revenues are estimated to cover only 78 percent of scheduled benefits. This means that, under current law, benefits will have to be reduced by an estimated 22 percent at the end of 2032. If implemented, that would mark the first time in the program’s history that benefits decrease instead of increase.
A 22 percent reduction is just the beginning. This automatic reduction will rise over time, to 38 percent, in 2100.
If current beneficiaries were subject to a 22 percent reduction instead of a 3.6 percent increase, that would amount to about $450 less per month and $5,370 less per year for the average retiree who currently receives just over $2,000 per month. These cuts will presumably apply across the board, without regard to income, age, or other circumstances.
Congress could decide to avoid benefit cuts by raising taxes, but that would put an enormous burden on younger Americans — and it would directly contradict the program’s original purpose of preventing them from having to pay for the welfare of older generations.
Maintaining scheduled benefits once the trust fund runs dry would require an estimated 40 percent increase in Social Security’s payroll tax, from 12.4 percent to 17.3 percent. For a median worker with $65,000 in earnings, that would mean a $3,200 tax hike, with Social Security taking $11,250 per year in taxes.
For some perspective, Social Security started out as a 2 percent tax, and the original pamphlet that the government sent to Americans promised that Social Security would never take more than 6 percent of their wages. Today’s 12.4 percent tax — and the 17.3 percent or higher rate needed to sustain scheduled benefits — reflects how far the program has deviated from its original model.
Social Security was intended to protect older Americans from outliving their savings, and further to spare younger generations the burden of supporting impoverished seniors. Protecting seniors from poverty is not the same as providing six-figure benefits to the highest-income households.
To protect and improve Social Security, Congress should act before insolvency forces abrupt cuts to what seniors expect, or prompts lawmakers to enact massive tax hikes on younger generations. A gradual transition to a smaller, better-targeted program could protect lower-income retirees while reducing the burden on workers.
That should include gradually shifting to a universal benefit. In addition to a universal benefit making more sense than progressive benefits for a social insurance program, it would also reduce Social Security’s tax rate for everyone in the long run. And Congress should give workers the option, within Social Security, to build personal retirement savings they own and can pass on to their heirs.
A better-targeted Social Security program can protect vulnerable retirees without promising benefits that the program can’t afford. Otherwise, the cost-of-living adjustment will give way to a cost-of-insolvency adjustment that cuts benefits across the board.