Big Changes Are Coming to Social Security: Why 2033 Is an Important Year and What to Expect Before Then

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Big Changes Are Coming to Social Security: Why 2033 Is an Important Year and What to Expect Before Then.

personal finance :: 10hrs ago :: source - Motley Fool

By Adam Levy, The Motley Fool

Social Security has undergone some significant changes since Congress first passed the Social Security Act in 1935. In fact, the government program evolved significantly in almost every decade from its establishment through the year 2000. But Congress has failed to make any significant changes over the last 26 years.

Unfortunately, without major reform, Social Security is on track to deplete its Old Age and Survivors Insurance trust fund before the end of 2032, according to the most recent estimate from Chief Actuary Karen Glenn. There's precedent for Social Security to borrow from the Disability Insurance trust to pay retirement benefits, but the combined funds would run out by the first quarter of 2034.

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That makes 2033 an important year for Social Security. If Congress doesn't act before then, Social Security will have to cut retirement benefits.

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The biggest reason Social Security needs major reforms

This isn't the first time Social Security has faced the possibility of depleting its trust fund. The program came within days of forced benefit cuts before Congress amended the Social Security Act in 1983. At the time, the reforms were expected to ensure the program's solvency for the next 75 years.

Unfortunately, it became evident that Social Security would need some additional changes much sooner. By the 1990s, the actuaries were estimating Social Security would exhaust its trust fund as soon as 2029.

The chief culprit: growing income inequality. And the problem hasn't gotten any better since the 1990s.

The reason income inequality is so damaging to the trust fund is that the Social Security tax applies only to wages up to a certain amount. That cap automatically increases each year to account for wage inflation. In 2026, it's $184,500.

But if high earners increase their earnings faster than low earners, that means a smaller percentage of total wages paid to American workers are getting taxed. That means less revenue for the trust fund.

Combined with baby boomers beginning their retirements, that's putting significant strain on the program, forcing it to run a deficit. That deficit totaled about $200 billion last year. That amount will continue to grow for the foreseeable future without significant reform to increase revenue or decrease benefits paid.

What to expect by 2033

Congress waited until the last minute to make reforms in the 1980s, and we shouldn't expect things to play out much differently this time around. Unfortunately, the longer Congress waits to make changes to the program, the more severe they'll be and the faster they'll have to implement them in order to keep Social Security above water.

Congress is unlikely to cut benefits for existing retirees. Doing so would have severe political consequences, considering the importance of the senior voting bloc.

More likely, Congress will look to pass legislation increasing taxes on Social Security. Currently, up to 85% of Social Security benefits can be counted as taxable income. Congress could increase that to 100% for some retirees, sending the added tax revenue directly to Social Security.

Future retirees, however, could face much more significant changes. Potential tax increases could take the form of increasing the earnings subject to Social Security and raising the tax rate. Congress could pass legislation ensuring the Social Security tax applies to a stable percentage of total wages paid to all Americans, reducing the challenge of income inequality.

On the other side of the coin, future retirees could face benefit cuts. Those could include raising the full retirement age, reducing benefits for family members, and increasing the number of years of earnings that count toward your benefits calculation. (Social Security currently only counts your 35 highest-earning years when calculating your benefit.)

Given the timeline until the trust fund is depleted, the changes Congress enacts are likely to take effect quickly once enacted. So, while anyone retiring in the next few years could be safe from major reforms having too much of an impact on their benefits, younger workers could face much more severe changes that could require working longer and saving more in private accounts.

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