Why the Social Security Trust Fund is on the Brink of Collapse

And Congress won't fix it for 7 years

Ric Edelman: It's Thursday, February 9th. The past couple of days I've been talking with you about retirement, how to calculate in about 30 seconds how much money you're going to need and what to do when you get laid off in your 50s and 60s and you find yourself getting discriminated against because of ageism.

Now, I want to talk with you about a related topic, Social Security. There was an op-ed in the Wall Street Journal the other day written by Andrew Biggs. He's a well-known player in the retirement field, senior fellow at the American Enterprise Institute, and he's about to join the Social Security Advisory Board. In his op-ed, he suggested that we freeze the maximum that you can get from Social Security at 2022 levels. He says this will cut Social Security's annual outlays and half that can help save the system from collapse. I'm a fan of Andrew Biggs. He and I have traded emails once upon a time. I like his idea.

Unfortunately, his proposal, I'm afraid, has no chance politically, at least not for the foreseeable future. The reason is that capping Social Security at 2022 levels amounts to a cut in benefits, mostly at the burden of middle-class taxpayers. But House Speaker Kevin McCarthy said just last week that cuts to Social Security are off the table, meaning Republicans will not support benefit reductions for America's retirees. Democrats have always hated the idea of cutting Social Security benefits. They would much rather raise taxes. And now, if the Republicans are also unwilling to cut benefits, well, the American Enterprise Institute's idea of capping benefits at current levels simply has no chance of being implemented by this Congress. 

And that's too bad because their idea is a fairly easy way to help prevent the Social Security trust fund from being depleted. But even if we did cap benefits at current levels, I'm afraid it's too little too late. The trust fund will be depleted anyway, likely by 2031. What happens then when the trust fund is gone, as expected in 2031?

Well, under current law, Social Security benefits will be cut 25% starting in about seven years. The average check is about $1,800 a month. It represents the majority of income for more than half of our nation's retirees. With these cuts, their check is going to get cut by $450 every month. That's going to push millions of retirees into poverty. They'll be unable to buy food or medicine or pay their rent.

But don't worry, Congress will fix the problem. But they're going to wait until right before the trust fund is gone before they act, which means they're not going to fix this until 2030. And their solution will be a combination of tax hikes and benefit cuts and delays, perhaps even including the American Enterprise Institute's idea of capping benefits or by 2030, actually reducing the benefits as part of a broader package that will certainly include tax increases. The reason Congress is going to wait until the trust fund's collapse is imminent is that the urgent, immediate, dire situation will give Congress the political cover they need to cut benefits and raise taxes. 

It's not my fault that prior Congresses didn't fix this mess, is what your representative will say. I had no choice but to vote for these draconian changes. In other words, meaning voting to increase taxes and to cut benefits. We had the same problem in 1982, and that's how Congress fixed it back then. Congress always likes to wait until it's at a cliff. Only then does America realize we have no choice. That gives Congress the political cover they need.

Think back to 1939. At the outbreak of World War II. There was a huge debate in our country over whether or not we should enter the war. But those debates ended as soon as the attack on Pearl Harbor happened. Franklin Roosevelt declared war against Japan the very next day and against Germany three days after that.

And remember the credit crisis of 2008? Treasury Secretary Hank Paulson begged Congress for funding to stop the crisis in its tracks. Congress said no. And then the markets collapsed. Hank went back to Congress, and this time they said yes, telling the country we had no choice but to provide the bailout. We went through the same thing during the pandemic. We waited for the crisis to hit. We waited for consumers, I mean, voters, to demand action that gave Congress the political cover they needed so they could get themselves reelected. 

And that's how we're going to fix Social Security this time around. But first, we're going to have to wait for it to be on the brink of collapse and then, boom, Congress will pass the changes in the law that we need to preserve the system. This is the only politically realistic approach for members of the House and Senate to not only fix Social Security, but to get reelected in 2030. And by the way, the vote on fixing Social Security, raising those taxes, cutting those benefits, it will, in fact, come after the election, not before. By then, we will be on the precipice for sure. So expect this to get scary and ugly. Oh, wow.

But in the end, Social Security will be saved. It will still be there for your retirement. You might have to get a little older to collect. You might get a little less. You might have to pay more in taxes along the way. But, well, better than nothing, I suppose. That's what's coming in seven years. So plan now for your financial future, which features a different amount of Social Security than you might otherwise be expecting.

And speaking of the future, what's the future of crypto? Reminder, if you missed my webinar that I held earlier this week on What's Coming for Crypto in 2023, you can watch the replay for free. Just go to DACFP.com.

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