The historic cost-of-living adjustment (COLA) in 2023 has moved Social Security’s insolvency date forward by a full year.
High inflation and rising interest rates made life difficult for many Americans last year, but retired workers on Social Security were hit especially hard. Rising prices eroded the buying power of Social Security benefits, and recession fears triggered a sharp decline in the stock market, erasing trillions of dollars from retirement accounts. Fortunately, inflation is now trending downward and the stock market has rebounded from its lows, but the macroeconomic challenges of the past year have created a new problem for Social Security beneficiaries.
Here are the important details.
Social Security’s OASDI trust fund could be insolvent by 2034
Each year, the Social Security Board of Trustees publishes a report detailing the financial status of the Old-Age, Survivors, and Disability Insurance (OASDI) trust fund — the source of Social Security benefits. The latest report included some alarming news. The OASDI trust fund is on pace to be depleted by 2034, one year earlier than projected by the previous report.
One reason for the timeline acceleration is the historic cost-of-living adjustment (COLA) applied to Social Security benefits in 2023. Beneficiaries got an 8.7% COLA this year — the largest raise since 1982 — to keep Social Security income in line with inflation. If the OASDI trust fund is indeed insolvent by 2034, continuing income from payroll taxes will cover just 80% of scheduled benefits at that time, and that figure will drop to 74% by 2097. In other words, Social Security benefits would automatically be cut by at least 20% once the trust fund is depleted.
Social Security benefit cuts are all but guaranteed
Social Security ran a $22 billion deficit in 2022, building on the $56 billion deficit in 2021, and the Board of Trustees says the program will continue to operate at a loss until Congress makes changes. In total, Social Security faces a $22.4 trillion funding shortfall through 2097, and the scope of that financing problem means benefit cuts are all but guaranteed.
History supports that assumption. The Social Security program last ran a deficit between 1975 and 1981, and it essentially broke even in 1982 and 1983. That prompted Congress to pass the Social Security Amendments of 1983, legislation that has helped keep the trust fund solvent over the last four decades. The Social Security Amendments of 1983 boosted revenue for the OASDI program by raising the payroll tax rate for self-employed individuals. But the amendments also reduced benefits by delaying full retirement age and allowing for federal taxation of Social Security income.
Resolving the current problem will likely involve a similar combination of changes. Some will boost revenue for the OASDI program, and others will reduce benefits. But there are a few silver linings for retirees. Congress has never let the Social Security trust fund become insolvent, and many experts believe future enrollees (especially high earners) will bear most of the benefit cut burden.
The longer Congress waits, the more serious the problem becomes
Social Security accounted for nearly 20% of federal spending last year. The sheer scope of the program makes it one of the more politically polarizing issues. Republicans and Democrats view Social Security’s financing problem differently, and members of both parties have proposed solutions that attack the issue from different angles, but lawmakers need to find common ground soon. The longer Congress delays making changes, the more drastic the changes will need to be.
According to the Board of Trustees, a benefit cut of 21.3% in January 2023 would have kept the OASDI trust fund solvent through 2097. But if Congress delays until 2034, a benefit cut of 25.2% will be necessary to achieve the same outcome.
