Underfunded Social Security – How Will It Be Fixed?


For many Americans, Social Security retirement benefits are the backbone of their retirement income.  Unfortunately, the March 2023 Trustee’s Report for Social Security now projects the exhaustion of the Social Security Trust Fund in 2033.  Once the Trust Fund is exhausted, benefit payments cannot exceed the annual income received through payroll taxes, which may result in benefit reductions of 20% or more.  The only way this shortfall can be fixed is by cutting benefits or by generating additional income through taxation and there is a myriad of different ways being proposed to do just that.  Although I don’t know what the ultimate solution will be, I do feel that Social Security is too politically sensitive for Congress to let it fail.  The only question is, who will bear the burden of restoring its solvency?

Two proposals were recently introduced into Congress which seem to provide insight into the current mindset for fixing the problem, and predictably they place the burden on those with high incomes and the wealthy.  Both proposals include a requirement to assess Social Security taxes on all income over $400,000.  This threshold is not indexed, so once inflation increases the current $160,200 earnings limit to $400,000, all income would be taxed.  In addition, each proposal includes some kind of tax on the Net Investment Income as generally defined by the Affordable Care Act.  However, lower wage earners, current beneficiaries, and those without significant assets would be spared from the most onerous impacts of the proposals.  It is interesting that the proposal getting the most attention adds temporary benefits for less wealthy beneficiaries that would significantly impair the ability to fix the problem.

More progressive ideas have also surfaced that would push the burden of raising additional income onto more well-to-do retirees through changes in the initial benefit calculation and how it is adjusted for inflation.  Some of these proposals would reduce the benefit paid on the upper tiers of a retiree’s average monthly income while also reducing the cost-of-living adjustment for high-income earners.

Of course, there were many other steps contemplated and quantified in the trustee’s report that could be considered to address program solvency.  Each of these options has a relatively small individual impact, but collectively, they could prove to have a meaningful impact.  They all contemplate some form of benefit or taxation change, but not all of them would improve the situation.  As noted above, some would improve benefits or reduce taxation for certain segments of the population.

Although we don’t know how Social Security’s looming funding problems will be resolved, the program is too important to the voting public to fail.  Many different tools are available, and it seems that a combination of them will be required.  However, at the most basic level, any fix will require raising taxes, reducing benefits, or likely both.  Most of the current proposals impact future beneficiaries far more than current beneficiaries.  Consistent with the current political mood, early proposals protect lower earners and penalize those with higher wages and investment income.  If these strategies come to fruition, it will be necessary for investors to carefully consider their income sources and investment strategies in the future.  Legacy Trust will be watching the Social Security developments carefully, and we will be prepared to help you determine the impact of any change on you.  Please feel free to contact us with questions about this or would like our wealth management team to help you develop a comprehensive retirement strategy.