ELEVEN YEARS — THAT’S ALL THE TIME Congress has left to come up with a solution to continue funding Social Security at current spending levels. That’s the conclusion the Congressional Budget Office drew in its 2024 report — and their deadline is a year later than the drop-dead date previously projected by the Social Security trust fund's board of trustees in their prior report.¹

 

As more American’s reach retirement age, concerns about the program’s future solvency have risen. Various methods of shoring it up have been debated by politicians and policy experts, and the debate will undoubtedly heat up as the deadline grows closer. “While a funding solution is likely to be found for this critical retirement program that’s supported millions of Americans since the 1930s, it’s not a bad idea for retirement savers to review their own retirement funding plans and stay aware of developments in Congress," says Anil Suri, a managing director, Head of Asset Allocation & Portfolio Construction Analytics in Chief Investment Office, Merrill and Bank of America Private Bank.

 

A recent Chief Investment Office report, "Social Security Insolvency: What Can Be Done and What's at Stake?" answers key questions about projected shortfalls, possible solutions and what individuals need to know about their own benefits. Here are some highlights.

 

Q: How is Social Security funded, and what is its current status?

A: Social Security funding comes mainly from employer and employee payroll taxes of 6.2% each (12.4% total) on wages up to $160,200 per year. The challenge: "As baby boomers continue to retire, Social Security payouts are increasing a lot faster than contributions," Suri says. "In 2022 alone, the system posted a $22.1 billion deficit."²

 

Q: What happens if the fund becomes insolvent?

A: That's not fully clear, Suri notes. “Insolvency means that the trust fund is unable to pay benefits in full and on time. It does not mean that Social Security will be completely eliminated and unable to pay any benefits.” But future benefits could only be paid from taxes collected, which would cover roughly 80% of benefits. While beneficiaries would still be legally entitled to their full scheduled benefits, the federal Anti-deficiency Act prohibits government spending in excess of available funds. Since current contributions wouldn't meet the full obligations, recipients might receive timely but reduced payments or be paid in full but on a delayed schedule.

 

Q: What are some potential fixes, and when do they need to be implemented?

A: A wide range of potential solutions have been proposed, including increasing the full retirement age, hiking the payroll tax on wages over a certain amount, and reducing benefits for higher lifetime earners. As for when a fix needs to be implemented, "the short answer is now," Suri says. Waiting until the brink of insolvency could place outsized burdens on contributors and/or beneficiaries a decade from now.

 

Q: What should people planning for retirement consider?

A: Most proposals for Social Security solvency involve higher payroll taxes rather than cuts in benefits, Suri notes. “Still, the possibility of lower benefits provides another incentive to start saving early, invest in tax-advantaged retirement savings plans and boost your savings rate when you can,” he says. Whether you're just starting out, nearing retirement or already there, it may be a good idea to invest some time now in understanding your options and strengthening your personal plan.