The 2024 Annual Report of the Trustees of the Social Security system contains good news and bad news.

The good news is that Social Security will be able to pay current benefits until 2033. The bad news is that Social Security will only be able to pay current benefits until 2033. Without any program changes, benefits after 2033 would be reduced by 21%.

Under current law, Social Security is funded from payroll taxes. For many years, annual payroll taxes collected exceeded annual benefits paid. The excess became the Social Security surplus.

With life expectancy increasing and Baby Boomers reaching retirement age, annual payroll taxes fall short of annual benefits. The difference is paid out of the surplus. The surplus is projected to run out in 2035. At that point, annual benefits cannot exceed annual taxes.

There are four solutions: increase Social Security taxes, reduce Social Security benefits, improve investment returns and/or use general tax revenue.

Taxes can be raised in one of two ways. Social Security and Medicare taxes are currently 12.4% of payroll income up to $168,600. Some proposals remove the income cap entirely. Others remove the cap for payroll income over $400,000. Either way, this will not cover the shortfall. The Manhattan Institute estimates that eliminating the cap entirely will only cut the Social Security deficit in half.

Alternatively, the payroll tax rate could be raised. A 2018 study by the Congressional Budget Office estimated that an immediate increase to 14.4% would delay depletion by nine years.

Benefits can be cut in any number of ways. The most common proposal raises the retirement age. When Social Security was first enacted, life expectancy was 61 years and benefits started at age 65. Although full benefits now start at 67, life expectancy is 84 to 87 years.

Other proposals would means-test benefits so that retirees with more income collect less than retirees with less income. Some propose raising taxes on Social Security benefits although this would hit low-income beneficiaries especially hard.

A stealthy way to cut benefits would be to reduce or eliminate cost-of-living adjustments that increase benefits to offset inflation. Benefits would look the same but would purchase less.

A little talked about improvement could be investing some of the Social Security surplus in assets like stocks that produce higher returns over time than government bonds. Since George W. Bush floated the idea of privatizing part of the surplus in 2005, the stock market as measured by the Standard & Poor’s 500 Index returned about 525% compared to the 70% or so for the bond market.

Finally, Social Security taxes could be supplemented with general tax revenues. This would add trillions to Federal deficits unless other taxes were raised. It would further disconnect Social Security from the source of its popularity — the not-entirely-accurate idea that the benefits retirees receive are earned as a result of the money they contributed.

As it stands, Social Security is the financial equivalent of global warming — a slow-moving catastrophe in the making where timely action is of the essence.

Jeffrey Scharf welcomes your comments. Contact him at jeffreyrscharf@gmail.com.