The state of Social Security: How Congress can address potential shortages

You've worked hard and done your best to look out for your family while saving for the future, so it's understandable that you may be curious to learn what resources you'll have available for your retirement years—such as Social Security.

A common concern among workers right now is that Social Security may one day run out, leaving many people unprepared to cover the costs of a long retirement. Will Social Security run out before current workers can tap into their benefits?

Unless a major intervention occurs, Social Security benefits are likely to be reduced in the future—but some benefits still will be paid out. The situation may be remedied if appropriate action is taken, but it does mean that workers should save independently for retirement to make sure they have enough money accumulated to support themselves in their golden years.

The truth is, none of us accurately can predict the future of Social Security. Changes are likely to be made in the coming years to try to fix this program. Here's more insight into the current Social Security crisis, what some proposed solutions are and how they might affect taxpayers.

The Social Security program has been paying out benefits to Americans since 1935. In 2022, an average of 66 million people are receiving Social Security payments every month. These benefits exist to provide consistent monthly income to workers—or their family members—who either have reached old age, died or become disabled.

Social Security is paid out from two main trust fund reserves: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund (referred to together as OASDI). They're funded by both tax revenue and interest from Treasury securities investments. In 2021, the total of all benefit payouts from Social Security, excluding payments to the Railroad Retirement Board, was $1.133 trillion—$993 billion from the OASI Trust Fund and $140 billion from the DI Trust Fund.

The big concern surrounding Social Security is that the benefits that many workers are currently paying into will run out before they reach a point in their life where they qualify for these benefits. In its 2022 report, the Social Security department actually projected that the DI Trust Fund wouldn't run out anytime before 2096. However, that fund pertains just to disability insurance. The fund that retirees and survivors receive benefits from, the OASI Trust Fund, has an expected depletion date of 2034. If pooled together, the combined OASDI funds could make it to 2035.

Understandably, many people are concerned about the potential Social Security shortages as they may be planning to rely on Social Security benefits to help them stay afloat during retirement.

Shortages are on the horizon for quite a few reasons. To start, the nation's current Social Security needs are larger than the annual tax collection amount. Because the Social Security Administration (SSA) is paying out more benefits each year than the revenue generated to supply these funds, the nation's Social Security savings quickly are being depleted. Once this happens, the program would rely solely on ongoing tax revenue, which is expected only to cover around 76% of currently scheduled benefits.

The challenge with fixing the nation's Social Security problems is that the solutions aren't very appealing to most constituents. Raising taxes, modifying benefits or potentially doing both may be necessary to keep the program working. Another complication is that some variables causing problems with funding can't be controlled, such as life expectancies and the economy.

Congress is working to solve this problem. One current proposed solution is the Social Security Expansion Act. The bill, introduced by Sens. Bernie Sanders (I-Vermont) and Peter DeFazio (D-Oregon), focuses on plans to raise taxes on the wealthy in order to extend Social Security's solvency for 75 years and to make benefits more generous (an increase in individual benefits by $2,400 a year).

Sen. Mitt Romney (R-Utah) has proposed an alternative solution—a bill called the TRUST Act—which would look to create bipartisan committees that could find possible solutions for a variety of ailing federal programs, including Social Security and Medicare.

It's unclear if either act will pass.

Those bills aren't the only solutions being proposed for the Social Security crisis. Other potential solutions that lawmakers and financial experts frequently discuss include the following:

• Modify benefit calculations. One potential way to reduce the life of the trust funds is to change the formulas used to determine what Social Security payments should be. For example, the SSA currently uses a recipient's highest 35 years of salary history to decide how much their benefit amount should be. If the SSA increases these years, that can help reduce that average earnings for each beneficiary and the size of their SSA benefit. This tactic is also thought to motivate future recipients to wait until they're 67 to start receiving benefits (this is the age when someone qualifies for full SSA benefits) as most people make more money in the end years of their careers.

• Raise the full retirement age. Currently, the full retirement age is 66 to 67 (when you were born affects which age you qualify at). It's also possible to start receiving Social Security benefits before this age, but then you have to accept a reduced amount. Some suggest raising the full retirement age, as making people ineligible for longer can take a lot of strain off the program.

• Change the taxable wage cap. It's been suggested that setting the current taxable wage cap at a higher amount would help keep Social Security funds solvent for the next several decades. Some people want to eliminate the cap completely. The current cap is $147,000, which means people who earn $147,000 in wages and those who earn $1 million in wages pay the same amount of OASDI tax.

• Increase payroll tax rates. The current payroll tax rate is 12.4% and some propose raising that amount incrementally to bring in more funds. However, there is concern that even a small payroll tax rate increase can create challenges for those who are self-employed or who earn low incomes.

• Broaden the participant base. Some state and local employees aren't eligible for Social Security benefits because they have public pension coverage. If new state and local workers are instead made part of the Social Security system, this could greatly increase the amount of cash flowing into the system, but also would lead to having to pay out more benefits down the road. This change could cause a lot of problems for current state and local pension plans as they, too, rely on new income coming in to fund their benefits.

• Reduce benefits for future recipients. One way to help make it possible to provide some level of support via Social Security in the future is to reduce the amount of benefits newly eligible retirees receive. Experts estimate that cutting payments to new recipients by just 3% can extend the life of the Social Security trust funds by 10 years.

• Lower the cost-of-living adjustment (COLA). Annually, the payments beneficiaries of Social Security receive are typically increased slightly to help protect against the effects of inflation. Some people are proposing reducing these COLA adjustments to help stretch funds further. This isn't a popular proposed solution, as Social Security COLA increases are already considered to be below the general inflation rate and aren't thought to extend the life of the program much further. The beneficiaries, however, would eventually feel these cuts substantially.

• Expand the definition of income. Only certain forms of income are subject to SSA payroll taxes. For example, the value of employer-sponsored group health insurance doesn't count as income. Some believe that slowly eliminating these exceptions can help keep the Social Security program sufficiently funded for longer.

It's worth noting that none of these proposed solutions are guaranteed to work and each solution requires much more detailed planning than these brief synopses can provide. It is helpful though to get an idea of what the proposed solutions for extending the reach of Social Security benefits are and how they can potentially affect your unique financial situation.

So, will Social Security run out, and what happens if Social Security runs out? It's hard to predict exactly what will occur, but it's a good idea to save for retirement independently no matter what may come of the Social Security program.

As nice as it would be for the Social Security crisis to be fixed and have everyone benefit from the program they pay into, there's no guarantee that will happen. Even if you do receive Social Security income one day, it may not be enough to fully fund your retirement. This is why it's so important to prioritize retirement planning and investing. Everyone needs to save for retirement under the assumption that they will be supplementing Social Security with other income sources.

Need help planning for the future? Connect with a financial advisor to set up a forward-thinking retirement savings plan.