3 Takeaways from the 2020 Social Security Trustees Report

3 Takeaways from the 2020 Social Security Trustees Report

Many retirees depend on Social Security benefits to keep themselves afloat and to supplement their savings once they stop working. For most people, Social Security benefits alone do not provide a sufficient retirement income, and the situation may become worse in the decades to come. The Social Security program has faced some financial hardships for many years, and the economic fallout from the coronavirus may further damage the program. The trustees who oversee the Social Security trust funds issue an annual report about the program’s financial health, and the document was released in early 2020. The following are some key takeaways from this document that current Social Security recipients and those who plan to claim benefits in the future need to know:

Social Security’s trust funds are expected to run out of money by 2035


Each year, people look forward to the Trustees Report, as it projects when the trust funds supporting Social Security will run out of money. According to this year’s report, the combined trust funds will have nothing left in them by the year 2035. However, the actual situation is a bit more nuanced. Social Security actually has two separate trust funds. The fund for old age and survivor benefits will run out of money in 2034, according to current projections, which is the same as what was predicted last year.

A second trust fund supports disability benefits. This fund has actually become progressively healthier financially with money excpected to last until 2065, which is 13 years longer than last year’s projection. Unfortunately, the disability fund is much smaller than the old age and survivor fund, so transferring money from one to the other would not have a significant benefit.

Solutions for solving the Social Security trust fund issue

The Trustees Report includes a recommendation of what lawmakers should do to solve the Social Security shortfall. Typically, the document recommends reducing benefits and/or expanding revenue to make the funds last longer. The primary means of increasing revenue is to drive up payroll taxes. This plan is generally not widely accepted since it would involve a large tax hike. Currently, the federal government takes 6.2 percent of employees’ pay as a tax to fund Social Security. In order to avoid the 2035 projection, taxes would need to go up by 7.77 percent, which is significantly higher than the 7.55 percent recommendation that was given last year.

This increase may reflect the current bear market, although people should also recognize that a greater distance needs to be covered each year as the deficit grows. The second choice is to reduce benefits, although doing so would mean cutting everyone’s payments by nearly 20 percent. The other option is to reduce benefits only for people who are becoming eligible, although that would require a cut of nearly 25 percent. These figures are up 17 percent and 20 percent from last year, respectively. The cost of fixing the problem will likely only increase with time. For example, waiting until 2035 to increase taxes would mean hiking them up to 8.265 percent. Cutting benefits in 2035 would mean a 25 percent reduction across the board.

Significant cuts to benefits for retirees may occur by 2035


If the Social Security trust fund becomes depleted, it won’t mean that no one will receive the benefit moving forward. Instead, it will simply mean that the government will not have enough money to cover the amount due to each recipient without pulling money from other sources. Simply put, the current payroll taxes do not provide adequate funding for the program on their own. The Social Security trustees predict that the when the old age and survivor fund runs out of money in 2034, people will only be able to receive about 76 percent of their pledged benefit. On the other hand, if the disability fund runs out of money in 2065, Social Security should still be able to cover about 92 percent of the amount due.

If the trust funds become combined, then people across the board will see a 21 percent reduction in their benefits. In other words, it will become more difficult than ever before to rely solely on Social Security for financial security in retirement. People preparing for retirement in the coming decades need to keep this possibility in mind and plan accordingly, meaning that they may need to save more money than initially planned in their investment accounts in order to cover the difference.

The bottom line

Currently, it is too early to tell whether or not Social Security will really end up reducing benefits in the future. Lawmakers certainly want to avoid this possibility and may end up developing a different solution. However, it is important for retirees and people approaching retirement to recognize the possibility that their Social Security benefits could be significantly less than expected or even reduced years into retirement. Creating a strategic plan to deal with this possibility now will prevent avoid hardship down the line, and there is plenty of time to prepare.