In 2035, What Will Social Security Look Like if It Runs Out?

The future of Social Security is still unknown, prompting people to wonder, “Will Social Security ever run out?” According to the Social Security Board of trustees’ 2021 annual report,

the agency’s cash reserves will be drained by 2034, a year sooner than their 2020 report predicted. After that, annual taxes are estimated to cover only around 78 percent of the benefits.

Find out what else is in store for Social Security in the near future, as well as what the program will look like in 2035 — you might want to start saving now.

Why Is Social Security in Peril?

Longer life expectancies, a reduced working-age population, and a rise in the number of retirees are all contributing to the problem.

By 2035, the number of people aged 65 and more in the United States will have risen to more than 78 million, up from around 56 million now. As a result, more people will be withdrawing money from the Social Security system, while fewer will be contributing.

However, this does not imply that the program will run out of funds totally. Approximately 78 percent of scheduled benefits will be covered by payroll taxes.

However, if the funding gap isn’t closed, retirees’ benefits may be reduced, and workers may be required to contribute more to the system. According to experts, this is how Social Security could appear in the future if no reforms are made.

Worst-Case Scenario: Benefits May Be Reduced

If you plan to rely on the program in 2035, keep in mind that you may receive fewer Social Security benefits than you anticipated.

According to the board of trustees’ annual report for 2021, if no modifications are made to address the trust fund shortfall, payouts will have to be cut by 22%.

For many retirees, such a reduction in benefits would be a significant financial blow. According to the Social Security Administration, 50 percent of elderly married couples and 70 percent of elderly single people rely on Social Security for at least half of their income.

In 2035, What Will Social Security Look Like if It Runs Out

Are Benefits Likely to Be Reduced?

Some experts believe that a significant reduction in Social Security benefits is unlikely.

“The repercussions of that event would be beyond devastating for everyone in the country,” said Retirement Capital Planners’ Joseph E. Roseman Jr., a Social Security expert and retirement planner. “You’re dealing with a national tragedy.”

That is why he believes Congress will intervene before 2035 to avoid such a drastic reduction in benefits. A significant reduction in benefits is unlikely, according to Mary Beth Franklin, a Social Security specialist and contributing editor for Investment News.

  • “As pensions fade away, people become increasingly reliant on Social Security,” she explained. Because of the program’s popularity, legislators are unlikely to mess with benefits for current retirees, forcing them to find other ways to address the trust fund deficit.

How Can Social Security’s Budget Be Balanced?

Even though Social Security isn’t scheduled to run out of money until 2034-35, various proposals for dealing with the budget gap have already been discussed. These are some of the possibilities:

  • Increasing the rate of payroll tax
  • Increasing the amount of income that is subject to Social Security taxes
  • Raising the retirement age to its maximum level
  • Annual cost-of-living adjustments should be reduced.

Benefits reductions

It’s possible that the Social Security payroll tax rate will increase.

If benefits aren’t decreased, the program’s tax income will almost certainly have to rise. Increasing the payroll tax rate is one approach to accomplish this.

Social Security is supported by a 6.2 percent payroll tax paid by workers and a 6.2 percent payroll tax paid by employers (self-employed people have to pay the full 12.4 percent ).

What Would Take Place

As the trust fund’s holdings deplete, the payroll tax would have to rise to keep the program going. If nothing is done until 2034 or 2035, the rise will have to be even more dramatic.

Roseman, on the other hand, does not believe Congress would increase the payroll tax to build trust fund reserves. “Of everything you can look at, there’s probably the least appetite for that,” he said. “It’s a tax hike,” says the narrator.

In 2035, What Will Social Security Look Like if It Runs Out

With this change, what would Social Security look like in 2035?

A rise in the payroll tax rate could come in a variety of shapes and sizes. The whole payroll tax is currently split evenly between the employee and the employer.

The tax increase could be distributed equally among employers and employees, or it could be distributed more heavily to employers in order to conceal the tax increase from taxpayers.

Rep. John Larson (D-Conn.) has proposed legislation dubbed the Social Security 2100 Act that favors the latter option.

It would hike the federal payroll tax rate for employers by 6.2 percent, but only for employees earning more than $400,000. According to Politico, the bill has gathered some support but has stalled in Congress.

It’s possible that more wages will be taxed

Raising the number of earnings subject to taxation is another possibility for increasing tax income to pay Social Security. Social Security taxes are only applied to wages up to the Social Security contribution and benefit base.

What Would Take Place

To keep the trust fund afloat, Franklin believes the taxable wage cap should be raised even higher — or abolished totally — so that all income is subject to the payroll tax.

This move would affect high-income individuals whose incomes exceed $137,700 and are currently exempt from Social Security taxation.

With this change, what would Social Security look like in 2035?

Only those whose wages exceed the present contribution and benefit base would be affected by raising the taxable wage limit.

If you earn $80,000 per year, for example, you pay Social Security taxes on all of your earnings, so whether the maximum is raised to $130,000, $300,000, or eliminated totally has no impact on your payroll taxes.

If you earn $250,000 as a W-2 employee, however, you only have to pay Social Security taxes on the first $137,700, totaling $8,537.40. If the ceiling was raised to $300,000, you would owe $15,500 in Social Security taxes on your $250,000 income.

It’s possible that the full retirement age will rise

Because tax hikes are unpopular, Roseman predicts that Congress will raise the full retirement age for Social Security benefits. As a result, younger generations will have to labor longer before being eligible for benefits.

The age at which you can earn full retirement benefits currently ranges from 65 if you were born before 1937 to 67 if you were born after 1960.

What Would Take Place

Both Roseman and Franklin said there are plans to progressively raise the full retirement age to 69, which would allow the trust funds to keep more money.

At the same time, it may make it impossible for retirees to maximize their Social Security benefits. Currently, if you wait until age 70 to claim retirement benefits after reaching full retirement age, your payout increases each year you wait, according to Roseman.

With this change, what would Social Security look like in 2035?

Raising the retirement age when life expectancy rises may appear to be a fair reaction because people have more time to work. Raising the retirement age, on the other hand, effectively reduces benefits by delaying the payment of benefits that people expect.

Furthermore, many low-income workers, who have shorter life spans than wealthy people, have not benefited from the overall increases in longevity. The elderly and those on modest means would be the hardest harmed by raising the retirement age.

The COLA for Social Security may be reduced

Most years, retirees receiving Social Security payments will see a small rise in their checks to keep up with inflation. The consumer price index is used to calculate these cost-of-living adjustments COLAs.

In the last several years, there has been a 2.8 percent growth in both 2018 and 2019, a 1.6 percent increase in 2020, and a massive 5.9% increase in 2021.

What Would Take Place

Changes to cost-of-living adjustments may be made to keep the Social Security trust funds solvent, according to Roseman. For those born before 1960, the formula is unlikely to alter. People born after 1960, on the other hand, may receive a lower COLA, he said.

Benefit payments will not keep up with inflation if this happens. People who rely on Social Security for a living may have to cut back on their spending to make ends meet.

With this change, what would Social Security look like in 2035?

Inflation changes to Social Security income can be minor, as some recent years have demonstrated. Low cost-of-living adjustments may make it difficult for those on fixed incomes to meet their financial obligations in areas where housing and rent costs are growing year after year.

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Furthermore, the elderly spend more on healthcare than younger people, and healthcare prices tend to rise faster than inflation.

Benefits may be reduced

Decreasing benefits for all Social Security recipients, including those who are already receiving benefits, or merely cutting benefits for future Social Security beneficiaries, could alleviate the funding problem.

However, if nothing is done until 2034 or 2035, all benefits will have to be cut by 22%.

What Would Take Place

Benefit changes could come in a variety of forms of Social Security funds run out in 2034-35. The most straightforward cut would be an equal cut across the board.

Another alternative is to cut benefits in different ways depending on income. Benefits for the top 25% or 50% of earners, for example, maybe lowered, but benefits for lower-income Social Security claimants would be preserved.

Similarly, Social Security might become a means-tested benefit, with the recipient’s income or other assets determining a portion of the amount. Currently, regardless of your income or assets, if you paid into the Social Security system, you will receive benefits.

With this change, what would Social Security look like in 2035?

The average monthly retirement benefit in 2020 was $1,503. If benefits were lowered by 20% across the board, the average monthly payout would be reduced by $301, or $3,612 per year.

If benefits were cut by 23%, the monthly loss would be $346 each month, or $4,152 per year.

Is this a simple issue to resolve?

The Social Security shortfall, in Roseman’s opinion, is simple to repair — but getting Congress to make the required reforms is not. “No one wants to make a deal,” he remarked.

Roseman, on the other hand, does not believe that Social Security will run out of money. He reminds his clients that they can rely on it as a source of retirement income, but that it shouldn’t be their only source.

He said, “I would never advise somebody to live solely on Social Security.”