Social security will run out of money.

Panicked worried senior can't look at something terrible
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Social Security’s system of retirement benefits, which began in 1935, is an important foundation in the lives of American retirees. For most people over 65, it is undoubtedly difficult to imagine life without this retirement benefit.

About half of Americans age 65 and older live in households that depend on Social Security benefits for half or more of their income, the Social Security Administration says.. In a quarter of such households, Social Security checks make up almost all of their income.

Since its inception, Social Security has been hit by periodic financial crises, and Congress has always dealt with them with adjustments. Today, Social Security is approaching another financial cliff for these and other reasons.

  • The retirement of the massive baby boomer generation
  • Longer life
  • Low birth rate
  • Rising income inequality

Here’s a quick look at the problem and whether Social Security will let it fail this time.

How is Social Security financed?

Social Security Checks, Social Security Card, Cash
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Your Social Security pension check is funded by taxes on the wages Americans earn during their working lives and taxes on some Social Security retirement income.

Employers and employees each contribute 6.2% of wages to the fund in 2022 (maximum earnings of $147,000). The self-employed pay the full 12.4%. In addition, 40% of Social Security recipients pay income tax on their benefits, money that is returned to the Social Security Trust Fund.

Here is the breakdown of Social Security income sources in 2021:

  • Payroll tax$980.06 billion (90.1%)
  • Interest income$70.1 billion interest rate on invested funds (6.4%)
  • Benefit tax revenue$37.6 billion (3.4%)

Benefits now outpace contributions, and Social Security’s $2.9 trillion trust fund has begun to shrink to cover benefit checks.

Social Security isn’t going away anytime soon

Social Security is dead and buried in a metaphorical grave
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If nothing is done, the Social Security trust fund is estimated to be completely depleted by 2034.

But that doesn’t mean the death of Social Security. Benefits will not stop. the system will continue to operate and payroll taxes will continue to fund benefits.

Payments may eventually be reduced

Uncle Sam is cutting Social Security benefits
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After 2034, Social Security’s annual income will still be enough to pay about three-quarters of the benefits for the next generation of retirees. Even in 2096, Social Security income will be able to pay 74% of its costs.

Nothing can be lost if Congress acts

US Capitol
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Changes will almost certainly be required for Social Security to continue in its current form, says Stacey Johnson, founder of Money Talks News.

But the problem is not insoluble at all. Lawmakers have many options for responding to changing times. A few recommended by AARP include:

  • An increase in the payroll tax rate
  • Raising the taxable income limit above the current $147,000 to take more of the income of wealthy taxpayers
  • Involvement of state and local government employees in the system to expand the tax base
  • Gradually raising the age at which recipients can claim benefits

History provides many examples of Congressional action to preserve the program, including in 1950, 1954, 1956, 1961, 1972, and 1977.

One of the most significant reforms was initiated by President Ronald Reagan in the early 1980s. When the program faced a funding crisis, he initiated a study known as the Greenspan Commission, prompting Congress to act.

The 1983 law has long strengthened Social Security by, among other things, taxing benefits and raising the retirement age.

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