Social Security marks its 90th anniversary — here's what could happen to future benefits

CNBC

2 days ago

Ninety years ago, President Franklin Delano Roosevelt signed the Social Security Act, which created the program that now sends monthly benefit checks to millions of Americans, including retirees, disabled individuals and families.
But by the time the program celebrates its centennial, benefits may not look the same as today's Social Security payments.
The reason: Social Security's trust funds, which the program relies on to help pay benefits, are facing a looming shortfall.
Starting in 2033 — two years before its 100th anniversary — the program may only be able to pay 77% of scheduled benefits for retirees, their families and survivors, Social Security's trustees projected in an annual report released in June.
However, should those funds be combined with Social Security's trust fund for disability benefits, as has happened in prior emergencies, payments may be cut one year later, in 2034. At that point, 81% of scheduled benefits would be payable, Social Security's trustees project.
Importantly, Social Security benefits would not disappear entirely. The program would still have ongoing income from payroll taxes to help fund benefit payments.
That scenario is not inevitable. Changes to the program may be enacted sooner to shore up its funding and prevent sudden benefit cuts.
Most, 83%, of surveyed Americans think Social Security reform should be a top priority for Congress, even if it means benefit cuts or tax increases for future beneficiaries, according to a new poll from the Bipartisan Policy Center's American Savings Education Council. The group polled more than 4,000 adults.
"This is the time for action," said Sen. Bill Cassidy, R-Louisiana, who is among the lawmakers pitching a plan to help restore the program's solvency, told CNBC.com.
Cassidy has teamed up with Sen. Tim Kaine, D-Virginia., to co-lead a bipartisan pitch — the centerpiece of which is a new $1.5 trillion investment fund for Social Security, separate from Social Security's current trust funds.
The initial $1.5 trillion outlay would be borrowed. Because the money would be held in escrow and could be liquified, it would not increase the national debt, Cassidy said.
The funds would be invested more aggressively than Social Security's current trust funds, which are invested in U.S. Treasury securities. Because those investments are backed by the full faith and credit of the U.S. government, they are secure. However, the average rate of return over a one-year period was around 2.5% in 2024.
In contrast, the S&P 500 has returned an annual average of around 10%, though those results vary from year to year.
Investing the proposed separate investment fund in stocks, bonds and other investments could cover an estimated 70% of Social Security's trust fund shortfall, Cassidy said. That would make it much more doable for lawmakers to address the remaining 30%, he said.
The senators' plan does not include any benefit cuts or tax increases for seniors, Cassidy said. It would provide benefit increases for two cohorts — beneficiaries age 80 and older who are at less than 200% of the federal poverty level, and low earners who have a long work history earning low wages.
Lawmakers could consider increasing the size of the investment fund to help cover the rest of the shortfall, he said.
Rights to manage the fund would be left to a bidding process, which could result in lower fees and higher returns, Cassidy said.
Critics, including Rep. John Larson, D-Conn., have said investing in other securities as the senators' plan suggests would privatize Social Security and therefore threaten Americans' retirement security.
In response, Cassidy points to the federal Railroad Retirement system, which in 2001 moved from investing solely in government bonds to more aggressive instruments, including stocks. That change was approved by lawmakers on both sides of the aisle and has helped the program operate with a positive balance today.
Still, some experts are dubious.
In a recent Wall Street Journal op-ed, Andrew Biggs, a senior fellow at the American Enterprise Institute, said while he applauded the first bipartisan plan to fix Social Security in two decades, he questions whether the plan could work.
Among the concerns he details are the amount of money that the plan requires the government to borrow, as well as the increased investment risk that would be required without a guarantee of higher returns.
Cassidy and Kaine are not the only lawmakers looking at potential solutions to solve Social Security's dilemma.
Larson has a plan that has been reintroduced in multiple sessions of Congress that would provide benefit increases while increasing taxes on the wealthy. The last time Social Security was meaningfully enhanced was in 1971 under President Richard Nixon, Larson said in an interview with CNBC.com.
More than 5 million Americans currently receive below poverty-level checks from Social Security, according to Larson.
Larson's most recent proposal from 2023 would temporarily increase benefits for all beneficiaries, while also providing specific enhancements for those receiving minimum benefits; widows or widowers in two-income households; and children of deceased, disabled or retired workers who are full-time students. The plan also proposes changing the way annual cost-of-living adjustments are calculated.
To pay for those benefit increases, Larson's plan calls for income over $400,000 to be subject to payroll taxes. In 2025, workers stop contributing to Social Security for the year once they reach an income of $176,100. Both employers and employees pay a 6.2% tax on wages up to that threshold.
More from Personal Finance:Social Security cost-of-living adjustment may be 2.7% in 2026'Big beautiful' bill does not eliminate taxes on Social Security benefitsHow having a 'bridge' strategy can help Social Security claiming
The Bipartisan Policy Center poll finds a majority of Americans support lifting the cap on income subject to payroll taxes, with 65% of Democrats and 62% of Republicans. That includes a "significant majority" of respondents with annual household incomes over $200,000, according to the results.
Larson's plan also called for a separate 12.4% tax on net investment income for taxpayers making over $400,000.
Larson plans to reintroduce his plan in the current session of Congress with some tweaks.
"We'll be rolling out a presentation in September that will include not only protecting Social Security, but also enhancing it," Larson said.
The plan will also make it Congress' responsibility to act more frequently to help ensure benefits continue to meet individuals' needs, he said.
"I think that that's got to be paramount to keeping this in check," Larson said.
Larson plans to push for a vote on his bill. But he also wants an open debate.
"There has to be a public discussion," Larson said.
Most Americans — 64% of Democratic voters and 61% of Republicans — want Congress to work together across party lines to reform Social Security, the Bipartisan Policy Center found in its recent poll.
That's as 41% of surveyed Americans expect Social Security will be their primary source of income in retirement, according to the BPC. Moreover, 74% of Americans worry Social Security will run out before they retire, while 80% worry Congress will cut benefits.
Nevertheless, the poll results show Americans would welcome a "comprehensive, balanced reform package that entails both benefit adjustments and tax increases," said Emerson Sprick, director of retirement and labor policy at the Bipartisan Policy Center.
Increasing taxes on the wealthiest 1% to help repair the program's finances had the most support among BPC's poll respondents, with 85% of Democrats and 72% of Republicans. That's in contrast to the 65% of Democrats and 62% of Republicans who support a higher cap on payroll taxes.
A majority of voters also support adjusting benefits for those most in need, with 63% of Democrats and 62% of Republicans; reducing benefits for higher income individuals, with 64% of Democrats and 61% of Republicans; and increasing the amount that both employees and employers pay into the program, with 61% of both Democrats and Republicans. Most voters also support encouraging legal immigration that would result in more workers paying into the program, with 64% of Democrats and 54% of Republicans.
The urgency of addressing Social Security's funding woes will increase over time.
Two new laws have provided generous enhancements for certain Social Security beneficiaries. The Social Security Fairness Act increased benefits for some public pensioners, while President Donald Trump's "big beautiful" budget and tax package provides a tax deduction for seniors.
The changes in both laws will accelerate the trust fund depletion dates. The Fairness Act was included the Social Security trustees' latest projections. The more recent "big beautiful" legislation will move the insolvency date for the retirement trust fund to late 2032 up from the early 2033 trustees' projection, according to the Committee for a Responsible Federal Budget.
Senators who are elected in 2026 will be in office during those projected depletion deadlines, Sprick said.
As the trust fund depletion dates come closer, there will be more discussion about Social Security's future on Capitol Hill, Sprick said. The current proposals on Capitol Hill are a start, he said.
"We've put this off for way too long; the political process moves very slowly," Sprick said. "But that does not negate the fact that these conversations are moving in the right direction."