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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 tax incentives 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 combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) trust funds will be depleted in 2035. At that point, 83 million beneficiaries could face across-the-board benefit cuts of 21 percent if policymakers fail to act. Those projections were made before the effects of the pandemic were known; the date of depletion of the trust fund could be earlier than anticipated in the latest Trustees report.
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:
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 age 55 and above from any reduction in benefits and gradually phase in reductions for younger people 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 2018, Social Security was responsible for lifting almost 22 million Americans out of poverty, nearly 15 million of whom were seniors age 65 and older.