The Social Security Act provided essential benefits for struggling Americans and continues to do so today. When the Act went into effect, the U.S. was in the Great Depression. Many people, especially seniors, needed assistance with housing, food, and essentials because work was so difficult to find. Many people were out of work during this time, and the savings and investments we count on today were unreliable during such a deep recession.
Since 1935, Social Security has become almost taken for granted. Americans count on it in retirement planning; it also provides income security to widows, children who have lost parents, and disabled workers. What started as retirement benefits grew into a $1.6 trillion benefits program.
These wide-spanning benefits are financed by payroll taxes and other income taxes collected from today’s workers or a “pay as you go” program. This worked in the past because for 30 years, Social Security collected more in income than it paid out in benefits. During this time, the U.S. Treasury had invested in Treasury securities and held reserves. The first year it did not have a surplus was 2021. These reserves reached $2.9 trillion in 2021 when Social Security had to begin redeeming reserves to help pay for benefits.
For the short term, these reserves will continue providing full benefits until 2032. After that, the Social Security Trust Fund, which is essentially the financial accounts within the U.S. Treasury that hold money to pay benefits and administrative costs, will become insolvent and trigger a 24% benefit cut to all beneficiaries. Originally, these reserves were estimated to pay full benefits until 2034. This changed with the passage of the One Big Beautiful Bill Act, the historic tax cuts package that eliminated federal income taxes for most beneficiaries. While this allows beneficiaries to retain more of their benefits, it lowers the amount going into the Social Security Trust Fund.
While the Social Security Trust Fund will not be drained completely by 2032, Americans will feel substantial impacts unless Congress addresses the insolvency soon. A 24% cut in benefits translates to a $18,400 benefit cut for a middle-income retiring couple. This is a substantial cut as it can mean the difference between a retired couple living comfortably or not being able to afford their house anymore.
Not only will the 24% cut impact retiring couples, but the rising inflation is already making it difficult to maintain a lifestyle solely on Social Security benefits. Social Security provides at least half of the income for 63% of its recipients. Because this makes up a majority of the income for older Americans, the increasing inflation and reduction in benefits will have serious impacts on a large population.
Bottom Line
Social Security turned 90 this month, and Congress will need to address its financing and distribution in order to make it to 100 years fully funded. Congress should also consider how to shift future workers away from Social Security to private savings that are more secure. The 69 million Americans receiving Social Security benefits and future retirees rely on our country’s leaders to steward this program well.