Social Security retirement benefits represent a significant source of income for most retirees. With pensions having been replaced by 401(k)s, payments from Social Security are likely to be their sole source of guaranteed retirement income for most future retirees. Furthermore, when considered over a reasonable life expectancy, this income stream adds up to real money, providing a significant supplement to one’s own efforts to build a retirement nest egg.

In 2022, the average retirement benefit paid by Social Security is $1,657/month. This average benefit could amount to more than $600,000 over a lifetime for a married couple assuming one spouse only collects half of this figure as a spousal benefit and ignoring any future cost-of-living adjustments. The maximum benefit for a 65-year-old in 2022 is $2,993 monthly which translates into payments approaching $2 million over a 20-year retirement for a married couple.

The challenge facing Social Security is that promised benefits are funded by a payroll tax paid by workers and their employers. To keep the system solvent, ensuring that current and promised retirement income streams for future retirees can be fully paid, you need a strong economy and enough younger workers employed to fund payments to those that have retired ahead of them. An imbalance between the number of retirees and older workers relative to younger workers puts stress on the system’s ability to remain solvent.

To keep tabs on the health of the system, the Social Security Trustees issue an annual report to Congress so that lawmakers can consider whether changes are needed so that promised benefits can continue to be paid. The recently released 2022 edition of the report estimates that the OASDI trust fund will be drained by 2035 (one year later than projected in the 2021 report). At that point, payroll tax revenues are projected to be able to fund 80% of benefits promised to retirees. This is also a slight improvement over prior estimates but neither improvement is likely to provide great comfort to workers nearing retirement who will be counting on Social Security for retirement income and do not have the time or financial wherewithal to boost their own savings enough to offset the potential decline in Social Security payments.

As you might imagine, there are a considerable number of variables that factor into the 75-year projections of the Social Security system’s viability. Inflations rates, birth rates, and forecasts of economic growth all play big roles such that slight changes in the assumptions can tilt the report toward a more optimistic or pessimistic projection. While we can certainly quibble over such assumptions, there is no doubt that some changes are needed to shore up the system for future retirees. Shoring up the system either means getting more money into the system, cutting benefits, or a combination of the two. Focusing on the revenue side alone would require an increase in the payroll tax from 12.4% to 15.64%. On the benefits side, a reduction of 20.3% for all recipients would be required. Aside from these more brute-force approaches, the Trustees always provide a wide range of solutions to consider along with their projections.

The trick is getting Congress to act, which has been a tall order. However, there is one piece of legislation on the table that might at least get a discussion going even if it has little chance of passage. The Social Security Expansion Act was introduced last week which calls for a $200 monthly benefit increase and shores up the system on the revenue side by applying the payroll tax on all income above $250,000. Currently, the tax only applies to the first $147,000 of wages, adjusted for inflation. The bill would also base the annual inflation adjustment for Socials Security benefits on the Consumer Price Index for the Elderly (CPI-E) rather than the currently used index to more accurately reflect the inflation experienced by seniors due to their spending patterns.

Given the importance of Social Security for the financial health of most current and future retirees, I encourage everyone to tune into this debate and push their legislators to do the same. While the trust fund may remain solvent for another 13 years, the longer we wait to make changes, the more dramatic those changes will need to be to ensure that this important program remains available to all Americans.

David T. Mayes is a CERTIFIED FINANCIAL PLANNER professional and IRS Enrolled Three Bearings Fiduciary Advisors, Inc., a fee-only advisory firm in Hampton.  He can be reached at 603-926-1775 or david@threebearings.com.

This article originally appeared on Portsmouth Herald: Money Talk: Latest report highlights need for action on Social Security