Recently, a lot of people have been thinking about the cost-of-living increase (COLA) for 2025 and how it will affect benefits next year. There will be a raise in benefits starting in January, but we won’t know the exact amount until October 10, when the COLA is released.
The change will help seniors’ finances in the short term, but there are long-term worries for those who expect to get benefits for at least another ten years, especially since new predictions about Social Security’s future have been released.
Social Security Faces Insolvency Within a Decade
Social Security has been spending more each year than it brings in since 2021, and this is likely to continue. The program has been able to make up the difference by using its trust funds, which still have extra money in them. In spite of that, these funds are limited.
The Congressional Budget Office (CBO) said in September that the Old Age and Survivors Insurance (OASI) trust fund, which is in charge of retirement and death payments, will likely run out of money by 2033. The Disability Insurance trust fund, on the other hand, should last until 2064.
If the two trust funds were merged, which is one way to make the OASI fund last longer, they would both run out of money by 2034. This is mostly because the Social Security Administration gives out a lot more retirement and death benefits than disabled benefits.
If the government doesn’t do anything, people who get benefits could see them cut by 23% starting in 2035. By 2098, benefits would have stabilized after an extra 5% cut was made gradually.
These cuts would be terrible for a lot of retirees, especially those who don’t have enough saved or another steady source of income.
To give you an idea, a 23% cut would mean that the typical monthly retirement benefit would drop from $1,920 (as of August) to $1,478, which is a loss of about $5,300 per year. This could mean a big drop in the quality of life for a lot of seniors.
Potential Solutions
The good news is that the government probably won’t let such a big cut in payments happen. Social Security has had money problems in the past, most notably in the 1980s. During that time, changes were made to the program that allowed benefits to stay mostly the same. But those changes came with costs.
Some important changes from that time were:
-Rising the Full Retirement Age (FRA): The FRA is the age at which a beneficiary can get the full retirement amount based on how long they have worked. You can file an early claim, but your monthly payouts will be less. When the FRA was raised, younger claimants were punished more if they decided to start getting benefits at the same age as older claimants.
-Rising the Social Security Payroll Tax: All workers must pay a Social Security tax on their wages up to a limit set by inflation, which in 2024 was $168,600. At the moment, this tax rate is 12.4%, which is split evenly between workers and employers. When this tax was raised, workers’ take-home pay went down every year.
– Taxing Some Social Security Benefits: Some retirees have to pay taxes on their Social Security benefits if their provisional income (being their adjusted gross income (AGI), nontaxable investment interest, and half of their Social Security benefits) is more than $25,000 for individuals or $32,000 for married couples. This tax obligation made it harder for some people to pay their bills with the money they had coming in.
These steps are like the ones that are being talked about now as ways to deal with the current gap. But there hasn’t been a clear answer put forward yet.
According to the CBO study, the funding problems could only be fixed by either raising payroll taxes by 4.3% or cutting benefits by 24% permanently. Because these choices would have big effects on the economy, it’s possible that the final solution will be a mix of different strategies.
For example, payroll taxes might go up a little, and taxes on Social Security benefits for seniors might also go up. Instead of putting all the financial stress on one group of people, this kind of balanced method would spread the load more evenly among different groups.
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