Good news is on the horizon for Social Security beneficiaries. The Social Security Administration (SSA) has confirmed that starting in January 2025, recipients will see an increase in their monthly checks due to the annual Cost-of-Living Adjustment (COLA).
This adjustment is designed to help retirees and others receiving benefits cope with the rising cost of living driven by inflation. While the exact percentage of the increase is yet to be announced (set for October 10), this change is expected to bring some short-term financial relief.
Long-Term Concerns for Social Security
This Article Includes
While the COLA increase is welcome news, there are growing concerns about the long-term sustainability of Social Security. Since 2021, the program has been paying out more in benefits than it collects in revenue, leading to a growing deficit. To cover this shortfall, Social Security has been dipping into its reserve funds, which are depleting.
A recent report from the Congressional Budget Office (CBO) warns that if no significant changes are made, the Old-Age and Survivors Insurance (OASI) Trust Fund, which provides retirement and survivor benefits, could run out by 2033.
Meanwhile, the Disability Insurance (DI) Trust Fund is projected to last until 2064. Combining the two funds is one potential solution, but that would only extend their life until 2034, leaving the future of Social Security uncertain.
The Potential Impact of Benefit Reductions
If corrective action is not taken, Social Security beneficiaries could face significant reductions in their monthly payments—up to 23% by 2035, with further cuts possible by the end of the century.
For retirees, who often rely heavily on Social Security as a primary source of income, these cuts could be devastating. For example, a 23% reduction would decrease the current average benefit from $1,920 per month to around $1,478, resulting in an annual loss of approximately $5,300.
Solutions to Avoid Benefit Cuts
Fortunately, history shows that drastic benefit reductions are unlikely. A similar crisis occurred in the 1980s, which led to reforms that saved Social Security without severely impacting beneficiaries.
Several changes were implemented, including raising the Full Retirement Age (FRA), increasing the Social Security payroll tax, and taxing certain benefits for retirees with higher incomes.
Looking forward, a combination of solutions is being discussed to address the current funding shortfall. Among the options are:
- Raising the Payroll Tax: Increasing the percentage of wages that go toward Social Security could help address the deficit.
- Adjusting COLA Calculations: Tweaking the formula to better account for retirees’ costs, such as healthcare expenses, could ensure the adjustments more accurately reflect inflation.
- Raising the Cap on Taxable Earnings: Currently, only earnings up to a certain amount are subject to Social Security taxes. Raising this cap would mean higher-income workers contribute more.
The CBO estimates that a payroll tax increase of 4.3% or a permanent benefit reduction of 24% would be required to fully eliminate the shortfall.
However, a more moderate combination of these measures—such as a smaller tax increase paired with higher taxes on benefits for wealthier retirees—could spread the burden more evenly.
The Importance of Acting Now
The sooner policymakers act, the more manageable the solution will be. Raising revenue through taxes and making gradual adjustments to benefits are key strategies that could help preserve Social Security for future generations.
With proposals such as raising the retirement age or adjusting the COLA formula being floated, it’s clear that finding a balance between protecting current retirees and ensuring the system’s long-term stability will be a top priority.
Ultimately, while the upcoming COLA increase provides some immediate relief, the long-term future of Social Security remains uncertain. With thoughtful reform, however, Social Security can continue to provide essential financial support to retirees and other beneficiaries for years to come.