Social Security is running out of money in its main trust fund. The latest Trustees report predicts that Social Security will become “insolvent” in 2032 – one year earlier than previously expected.

Before you panic, you should know that “insolvent” is a technical term. It means there will be no “cushion” of reserves to pay benefits. Instead, present benefits will have to be paid out of present contributions, make by people who are still working.

But incoming receipts won’t be enough to pay the full promised benefits. Instead, if cuts are distributed evenly, Social Security checks will be reduced by about 20%. And even that reduction won’t be enough to solve the problem for the long term.

Congress has delayed facing this issue, until it is almost upon us. Here are some of the solutions they might consider to fully fund Social Security. And it’s worth noting that the words “fully fund” are subject to interpretation.

The Social Security actuaries report predicts an unfunded liability of $29 trillion through the year 2100. But the true unfunded liability, considering promises to all of today’s younger workers, is more like $71.9 TRILLION!

That’s a real number buried inside the trustees report in table VI.F1 on page 206 of a 266 page report! It’s a number equal to twice our national debt, which is another sea of $32 Trillion in red ink.
Clearly, there’s a disaster looming.

What Can/Will be Done?
1. Immediately raise the FICA (SS) tax rate. To do that, the 12.4% Social Security payroll tax rate needs to rise to 18.1% immediately and permanently to cover projected benefits through time and never have to raise the tax rate again. That’s a 46 percent tax hike meaning the system is 46 percent underfunded.

2. End the “Cap” on Payroll taxes, currently at $184,500. This means ALL earned income would continue to pay FICA taxes at the current rate. (Note: this would not include interest, dividends, capital gains.)
Eliminating the cap wouldn’t fix all of SS permanently, but it would likely fix 85% of the unfunded liability.

3. Reduce benefits proportionately – so those with higher incomes (from other retirement savings, dividends, interest, rents, etc) would see their benefits reduced more than the estimated 45% of recipients for whom SS is their primary retirement income.

4. Print the money! Of course, that is the direct way to inflation, causing prices to rise – impacting those on fixed incomes the most!

Clearly there are no easy choices. But politics aside, the huge baby boom generation now collecting based on the money they paid in over the years, is about to demand a reckoning. They will demand action be taken now because that future has arrived.

And you’d think Congress would pay attention – especially since they, too, collect Social Security benefits.

The Impact on Your Claiming Strategy
Before you jump to the conclusion that you should start taking benefits early, before full retirement age, you must consider the long-term impact. Social Security is your only inflation-adjusted, guaranteed lifetime income stream.

And as economist Larry Kotlikoff (who created MaximizeMySocialSecurity.com) and author of Get What’s Yours From Social Security, explains: “It still makes sense to delay taking benefits to your full retirement age – or even age 70 if you can afford it. There is a 76% difference in your benefit check if you wait till your maximum benefit. Claiming early, and gaining benefits for a few extra years can’t offset that larger benefit if you live beyond the average actuarial retirement age.”

Kotlikoff notes that when you take out insurance on your home or car, you insure for the maximum possible catastrophic exposure – your home burns down or your care is totaled. You don’t pay for just a small bit of insurance. Similarly he says: “You can’t count on dying on time.” If you live longer, Social Security is your catastrophic payout.

The Reality of a Fix
It’s unthinkable that Congress won’t legislate some type of fix – even if it is a short term delay in facing the inevitable. And, the terror of Social Security “running out of money” might actually encourage some creative thinking.

Kotlikoff says Congress might consider a VAT tax, much as Europe has done, to make up the difference. Or they could do something radically helpful and create a new Personal Savings Account that would build private index fund accounts (without Wall Street participation) and eventually eliminate Social Security for younger workers, while paying all promised benefits to those who have contributed.
This would work much like corporate pensions that were phased out in favor of 40l(k) plans more than 40 years ago. You can read more about this creative alternative at The Personal Security System – Fundamental Social Security Reform on Kotlikoff’s substack.

A Reality Check
Is the idea of really “fixing” Social Security just wishful thinking? Or faced with the huge Baby Boom generation – who tend to be voters and vociferous – will Congress act in time?
Only time will tell. And that’s the Savage Truth.