Social Security has been in the news recently because of some projections that it will hit dangerous levels of underfunding in a few years. And it’s likely to be a fairly prominent campaign issue in the 2028 races, at all levels, because it sure seems like something needs to be done in order to prevent some drastic cuts to senior’s benefits.
So, with that in mind, I recently put on my very dusty newspaper reporter Fedora and thought that it might be good to take a look at what the experts (both here inside Baird and some outside researchers) are thinking might happen.
“There’s no politician alive that could cut benefits and survive an election,” replied Michael Antonelli, a Market Strategist for Baird Private Wealth Management, when I emailed him to ask what he thinks about the scary projections that some people are making about the program. “Ninety percent of benefits are covered by payroll taxes. There’s no way anything meaningful can happen to SS, there’s just no political will to touch it.”
Here’s a longer video of his thoughts. https://www.bairdwealth.com/insights/market-insights/baird-market-strategy/2024/09/all-that-matters-busting-market-myths/
In the video he explains the math behind his assertion.
“Even if the social security fund went to zero, we’re covering the majority of benefits through our regular paychecks. For that remaining 17%, there’s a handful of ways that it could be addressed: cutting benefits, increasing taxes, or printing more money are just a few potential strategies. Each of these scenarios have drawbacks, but the idea that we’ll simply run out of social security funding full stop just doesn’t add up.”
Still, a report by Nationwide’s Retirement Institute reports that 7 out of 10 Americans worry that Social Security will run out of money in their lifetime.
And that fear is real, in my experience, because even though I work with people who have done the right thing and saved for their retirement, Social Security still provides some very important monthly money to supplement their need to have money to live off of.
The Nationwide report goes on to say that beginning in 2021, the government began tapping into a surplus fund to meet their obligations. This was done not because of Covid but because people are living longer and there was a decrease in the number of people in the workforce.
This is why the scary headlines are happening: the surplus fund would be depleted by 2032.
“The original pool of money will still be funded by payroll taxes, benefit taxes and interest,” the Nationwide report says, “but beneficiaries would begin receiving reduced benefits. The latest (Social Security) Board of Trustees report estimates that benefits will remain fully payable until 2032, with 78% of benefits payable through 2099.”
That doesn’t sound so bad, unless your monthly Social Security check drops by 22%. For a person expecting, say, a check of $2500 a month, a 22% cut would knock that down by $550. That’s a painful drop since no one, especially a retired person, wants to downsize their lifestyle in retirement.
What can be done to stop cuts like these involves a choice of what levers to pull. The main levers, according to this report in The Atlantic, are as follows 1) raising payroll taxes 2) hiking the eligibility age and/or 3) trimming benefit formulas for wealthier seniors.
“I’ve attended policy dinners,” the reporter in the Atlantic writes, “where Republican and Democratic lawmakers quietly outlined, with relative ease, a plausible deal that would gradually raise the normal eligibility age from 67 to about 69, trim benefits for higher earners, and raise the annual earnings limit for the Social Security payroll tax to somewhere between $250,000 and $300,000.”
Personally, I like exactly zero about the raising payroll tax idea (this situation is not the fault of people currently working). I don’t like the idea of raising the age for eligibility since that seems unfair to everyone expecting the benefit and potentially having to work longer instead of enjoying their “golden years.”
Now, what I do think is a viable option, is to really trim the payout for wealthy individuals who don’t need the monthly income as much as people in different situations. The idea that Warren Buffett gets a Social Security check doesn’t seem right. And he would almost certainly agree. So means testing someone’s tax return seems one way to replenish the surplus account – which I hope becomes a priority once we as a nation start to get close to 2032. What would be really good is if we started on this goal NOW instead of waiting.
But that’s probably not going to happen.
For 2026, earnings up to $184,500 are subject to the 6.2% Social Security tax for employees and employers, and any income earned above that specific wage cap is completely exempt from the Social Security portion of payroll taxes.
Eliminate (or raise) the cap and boom – we would then have a fully funded program and we could easily increase the monthly benefit to people inside the program. And I know, I know: that cap is too low. So let’s make it $700,000. That seems reasonable to prevent the amount of harm that a cut in benefits would mean to seniors on a fixed income. Plus, then we could get Elon Musk and Jeff Bezos paying for our retirements.
The Atlantic report concludes with this paragraph that I thought was a good summation of the situation.
“We’ve promised ourselves more federal retirement benefits than the economy can deliver at the tax rates we are willing to pay. Although the policy fix should be a relatively simple one, the politics will be challenging. This is not a problem that can be solved by simply taxing the rich or burying the federal government much deeper in depth.”
At a lunch meeting that the First Trust investment firm hosted in late July, Bob Stein from the firm was speaking about the state of Washington, D.C., the deficit and upcoming elections. I asked him about social security and he essentially said that lawmakers will be forced at some point to cover the shortfall and the most likely way that they will do this is by using what they did when Covid hit. He said that no one is Washington really wants to touch this issue.
“Your clients will get their checks,” Stein announced.
However, he did add that some tweaks may be needed to the program in the form of age adjustments. Here’s First Trust’s take on Social Security and the scary headlines that have been circulating of late.
Here was one good bit of history in regards to adjustments that have been in the past to Social Security. This is from an economist named Jeffrey R. Brown. He posted this essay on LinkedIn. https://www.linkedin.com/pulse/social-securitys-insolvency-does-mean-you-should-claim-brown-nryqc/
“Congress is unlikely to make large cuts to those already in or near retirement. History is not a perfect guide, but it is informative. The vast majority of proposals to reduce Social Security benefits that have ever been introduced in Congress have protected current and near-retirees. Knowing that cutting benefits for people already relying on the program would be political suicide, most proposals shift the adjustment onto younger workers via future policy changes - later full retirement ages, expanded taxation of benefits, higher payroll caps, phased-in changes decades out.”
The 1983 reforms (the last time we had a major change) are the clearest example: benefit formula and retirement-age changes were phased in gradually and applied to people who were, at the time, well short of retirement — not to those already collecting or about to collect.”
A few weeks later, in early August, I attended a breakfast meeting about Social Security that was hosted by Marc Kiner from Premier Social Security Consulting.
When I asked Marc what he thinks about the scary headlines that pop up every so often related to Social Security.
“The trust fund will go away but there’s always money coming in,” he said.
Then, most like everyone else I talked to, he suggested that there are plenty of options on the table for when the government decides to do something about the upcoming cliff. Marc, former CPA, was not a fan of the government because it’s so divided and, he believes, so distracted by other things.
In his opinion, raising the age when people can claim Social Security is one option. Changing around the way we don’t tax high-earners compared with lower wage workers is another.
He did offer up a few interesting facts that I hadn’t heard before.
About 7% of citizens wait until age 70 to claim Social Security.
Seventy million people are receiving monthly benefits.
And then there’s this one: the commissioner of Social Security is also the CEO of the IRS.
So it seems like it’s just a matter of time before politicians do something to change the current situation with Social Security. We just seem to need to look over the cliff’s edge before any real action is taken. Here’s to hoping it’s sooner rather than later.