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With the retirement of the baby boomers and lengthening life expectancies, programs critical to older Americans will come under significant strain in coming decades.
While the federal government provides major tax advantages to encourage employment-based retirement benefits and individual retirement savings, Social Security is the primary source of retirement support provided by the federal government and the largest program in the budget. It is a vital lifeline to millions of Americans, but without action, it will lack sufficient resources to pay for all of the benefits promised under current law. Almost every American worker pays a dedicated payroll tax, which entitles them to benefits when they retire or become disabled. But as the population ages, fewer workers will be paying taxes to support each Social Security beneficiary, thereby endangering the program’s finances.
Social Security's Trustees project that the Old-Age and Survivors Insurance (OASI) trust fund will be depleted in 2034. At that point, 74 million beneficiaries could face across-the-board benefit cuts of 23 percent if policymakers fail to act.
Many policy solutions exist for improving the financial outlook of Social Security’s retirement program, including increasing payroll taxes, raising the full retirement age, reducing initial benefits, and adjusting benefits after retirement. Proposals to put Social Security’s finances on a long-term sustainable footing include:
Options to increase Social Security’s payroll tax revenues
Options to increase the retirement age and index it to increases in longevity
Options to adjust benefits
Policymakers face the challenge of preserving the retirement system in a fiscally sustainable way that would strengthen support for those who need it the most while recognizing the limited ability of retirees and near retirees to adjust to major disruptions in their financial situations.
For that reason, proposals often exempt workers ages 55 and above from any reduction in benefits and gradually phase in reductions for younger people in order to give them time to accumulate more resources for retirement through pension plans or other savings. Importantly, if policymakers act sooner rather than later, they will have more reasonable options, which can be gradually implemented to reduce their impact on individuals. Conversely, every year of delay and inaction limits options and makes reform more difficult.
Understanding the importance of the Social Security program for low-income Americans is a critical aspect of reforming the program in a fair and equitable way. In 2014, Social Security provided more than 80 percent of retirement income to those in the bottom two quintiles of retirement beneficiaries (seniors with $23,592 or less of total income).