Social Security Trust Funds Are Expected to Run Out. Will Congress Step In Before They Do?

Recent reports estimate that the Social Security Trust Funds will be depleted by 2034, leaving beneficiaries to get less than the full amount they are owed. Some Americans wonder if Congress will bridge that financial gap before the clock runs out.

The trust funds act as the financial reserves for the federal program that supports retirees or those who cannot work because of a disability. Because the program pays out more than it takes in each year, the funds are rapidly depleting. Once these trust funds run dry, beneficiaries will only receive 81% of their benefits if Congress doesn’t provide more funding.

Investopedia asked Richard Johnson, senior fellow at the economic and social policy think tank Urban Institute, about how Congress may intervene to ensure Social Security beneficiaries’ financial security when the trust funds run out. This interview has been edited for brevity and clarity.

INVESTOPEDIA: Do you suspect Congress will intervene when the Social Security trust funds run out?

RICHARD JOHNSON: If Congress does nothing, we’re going to see a pretty sharp decline in benefits. It would create an uproar if people got a benefit cut of that magnitude, so I do think Congress will do something. 

Hopefully, they do before 2034 and don’t wait until the last minute because that would create a lot of anxiety for beneficiaries and make the problem worse, so the sooner they act, the better.

INVESTOPEDIA: If they do intervene, what would that policy most likely look like?

JOHNSON: There are a few things we could see.

We could see some changes to the benefits program where Congress cuts benefits for higher-income people, an expansion of the taxable base, an increase in the payroll tax rate, or, Congress could increase the eligibility age.

The rationale there is that people are living longer than they used to, so they could increase the full retirement age from 67 to 69 or older.

One of the drawbacks of doing that, though, is we’ve seen life expectancy not increasing much for people in the bottom of the income distribution, so there is a question as to whether or not increasing the retirement age would be fair for everyone.

INVESTOPEDIA: Based on your research and work with seniors, what would you want Congress to do?

JOHNSON: What makes the most sense to me is to increase the tax base by lifting the taxable maximum from $176,100 to closer to $300,000, then increase it over time with the growth in average earnings. 

Some work I’ve done suggests that about 25% of the shortfall that we see now in Social Security is due to an increasing earnings inequality, the fact that there is just less income that the Social Security payroll tax covers than it used to. 

I do think increasing the tax base makes a lot of sense and that could go a long way toward getting Social Security back in balance.

INVESTOPEDIA: What do you think will happen to retirees if Congress doesn’t act?

JOHNSON: We’ve done some estimates and found that the poverty rate would increase by about 50% for people 65 and older, so there would be a lot of economic hardship.

Older adults and those with disabilities are very dependent on their Social Security benefits. Overall, Social Security accounts for half of the income received by people 65 and older, and much more for people at the lower ends of the income distribution. 

If we were to see this roughly 20% cut in benefits, that would lead to a lot of economic hardship: people would have trouble paying rent, covering food expenses, paying for medications and other types of health care. We’d see a lot of hardship.

But I just can’t imagine that Congress would let that happen.

INVESTOPEDIA: How should those planning for retirement right now think about the possibility?

JOHNSON: We don’t know exactly how the changes to Social Security will play out because this has never happened before, so there is some uncertainty. 

I don’t think people who are actively in retirement have to worry too much about a cut in benefits though, because in 1983 when the last major Social Security reform occurred, there were no changes for people who were currently in retirement or close to it.

But as younger people plan for retirement, Social Security will be there in some form, we just don’t know exactly what the amounts are going to be yet. They might want to try to save more than they otherwise would have saved for retirement. 

As the population gets older, it’s important that Congress recognizes that we do have these looming payments to seniors that they need to consider as they’re making these tax and spending decisions.