The shortfall has been anticipated for years, and it’s partially the result of demographic shifts—there’s a growing population of older Americans with longer life expectancies meaning more people are receiving benefits, while a declining birth rate means fewer young workers are paying into the system.
As a result, the program's expenses are on track to exceed its income over time.
This doesn't mean Social Security will disappear in 2035. However, it does mean that without changes to the program, there might not be enough funds to cover all the scheduled benefits.
A Social Security shortfall could result in smaller monthly checks for retirees, which would impact low-income earners who rely heavily on Social Security disproportionately. Reduced benefits could also lead to increased poverty among seniors and create stress on household budgets.
Finding a solution to this shortfall requires a delicate balance between increasing revenue and decreasing program costs.
One potential solution that experts are suggesting is to raise the payroll tax, which would mean workers and employers pay a higher percentage of wages into the system. However, this could place an additional burden on businesses and individuals—raising taxes is rarely a popular political move.
Another solution involves gradually increasing the full retirement age, leading to a shorter period of benefit payments. While this approach could save funds, it might disadvantage individuals who need to retire earlier due to health or other reasons. This can also be controversial, as we saw in France in 2023, when there were strikes and protests in response to the government raising the minimum retirement age from 62 to 64. (In the U.S. the minimum retirement age is 62, but you must be 67 to draw your full Social Security benefits.)
Other experts propose means testing, which would limit Social Security benefits for wealthier retirees. This strategy is meant to ensure those who need the benefits the most have access to the money, but it also raises questions about fairness and what constitutes wealth in this context.
Another debated approach is to invest the Social Security trust funds differently; instead of investing solely in special-issue Treasury bonds, some advocate for alternative investments with potentially higher returns, though this could also expose the program to a greater risk.
Social Security is a cornerstone of economic security for millions of Americans. It's a primary source of income for many retirees, as well as the survivors of deceased workers and individuals with disabilities. Ensuring its long-term stability is crucial for mitigating the risk of increased poverty among seniors and maintaining social stability.
The road to addressing Social Security's funding challenge is complex and may involve a combination of the solutions discussed above. A viable solution will require compromise and a long-term perspective. Staying informed and engaged in the evolving discussions will be critical, as the choices made today will impact the future of this essential program for years to come.
While it can be hard to see how individuals can impact something as massive as Social Security reform, as an individual (employee/employer/financial advisor), you do have the power to manage your own finances.
As an employee, you can regularly contribute to your 401(k) as a way to ensure a more secure financial future.
As an employer, you can offer your employees a 401(k) plan (even better if you offer a matching contribution!), so they have a tax-effective and easy way to save for their future.
As a TPA or financial advisor, you can expand your book of business and help close the retirement gap, by providing your customers with a 401(k) for their small businesses.
At Penelope, we’re always here to answer your retirement questions. If you are interested in a 401(k) retirement plan, speak to our retirement specialists.
