Social Security's funding crisis is the elephant in the room. But don't ignore the mouse.

By Quentin Fottrell

No one knows what Congress will do if Social Security's trust fund were actually to be depleted

Legislators could exempt current retirees from any cuts to benefits, decide to protect lower-income beneficiaries, raise payroll taxes, or even all of the above.

What age should you take Social Security?

One reader has a theory: "The possibility that Social Security will run low on funds by 2033 if Congress does not act to prevent it may be the 'elephant in the room,' no one is talking about the 'mouse in the room.' Delaying Social Security until 70 results in an increased monthly payment - and that comes with proportionally higher cost-of-living adjustments. If Social Security payments are reduced in 2033, I will still have more income than if I had filed early. A 22% reduction on $3,000 results in a higher payment than a 22% reduction on $2,000."

This scenario brings us back to the same familiar place: We can claim Social Security early, say at 62, and get those checks while we still can but with a 30% permanent lifetime reduction. Retirees might decide to do this because we think we will die relatively young, based on our own health issues and family history, or because we need the money, or because we believe Social Security is going to run low in 2033. Or, as this reader suggests, we can wait until we reach our full retirement of 67 - or even 70, when we would get roughly 8% more for each of those three years - when we might see the same cut in benefits, but on a larger check.

If any future benefit reduction is applied at the same rate to everybody's Social Security checks, delaying until 67 or 70 would indeed leave the reader with a larger monthly check, because they would be starting from a larger base amount, and it would also increase the survivor benefit for a spouse if they were to die. However, no one knows what Congress will do if Social Security's trust fund were actually to be depleted, as experts predict will happen in less than a decade. Legislators could exempt current retirees from any cuts to benefits, decide to protect lower-income beneficiaries, raise payroll taxes, or even all of the above.

The problem is that everyone is seeking certainty - about their own longevity, about what will happen to Social Security in 2033 and about the security of their retirement - but real certainty doesn't necessarily exist. Waiting until 70 is essentially buying into longevity insurance, similar to taking out a life-insurance policy. If we live well into our 80s or 90s, the larger monthly benefit can more than make up for the years we didn't collect. If we die younger, claiming earlier may prove to have been the better financial choice. Some people have a better idea of what awaits them, health-wise, than others.

The reader makes a good point about inflation and the benefits of waiting to claim. Delaying Social Security does more than boost our initial monthly benefit - it also results in higher inflation-adjusted annual increases. Because each cost-of-living adjustment is calculated as a percentage of our current benefit, someone who claims at 70 receives a proportionally larger COLA every year than a person who claims at 62. The percentage increase is the same for everyone, but the dollar amount is not. That could add up to tens of thousands of dollars over the decades.

No one knows what Congress will do if Social Security's trust fund were actually to be depleted.

Social Security faces two structural challenges over the next decade. The first is funding: Because the trust funds are invested almost entirely in low-yield government securities, they generate less income than they would under a higher-return strategy, putting pressure on reserves. The second is the lack of choice - workers cannot direct their contributions into the stock market, because the money is managed collectively. That's by design: If another Great Depression struck, Social Security would, ideally, still be there.

Two trust funds do the work of supporting retirees and those who are unable to work anymore. The Old-Age and Survivors Insurance Trust Fund pays monthly retirement benefits to eligible retired workers and their families. Eligibility is tied to a worker's earnings history and requires sufficient work credits - typically 40, or roughly 10 years of employment. Public confidence in the system matters, because it rests on the government's ability to hold and manage payroll taxes and meet its obligations as promised.

The Social Security Disability Insurance program, meanwhile, provides cash benefits to disabled workers and their eligible dependents. To qualify for SSDI, we must have sufficient work history and a severe, long-term disability. Both OASI and SSDI are funded primarily through payroll taxes collected under the Federal Insurance Contributions Act and the Self-Employment Contributions Act, which together support benefits for retirees, disabled workers and survivors.

The SSDI Trust Fund is currently projected to remain solvent through the end of the trustees' 75-year forecast window (roughly through 2099, which seems like forever away). But after someone receiving disability benefits reaches full retirement age, their benefits are paid out of the OASI fund - and OASI is projected to be unable to pay full benefits starting in 2033. That means disability beneficiaries could feel the effects of OASI's shortfall, too, although anything could still happen.

We are all gambling on the future. We just don't use the same chips.

Don't miss: I'm a senior who barely survives on $1,300 a month. No way could I live on $1,000.

Check out the Moneyist private Facebook group, where members help answer life's thorniest money issues. Post your questions, or weigh in on the latest Moneyist columns.

Previous columns by Quentin Fottrell:

'I claimed Social Security at 62': At 76, I'm working at Walmart. Why do I still owe payroll taxes?

'It's heartbreaking': My brother claimed Social Security at 70. He died from cancer after one payment. Why wait to claim?

'I'd hate to end up with an unexpected tax bill': I'm 73 and still work full time. Can I avoid paying taxes on my Social Security benefits?

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com.

By emailing your questions to the Moneyist or posting your dilemmas on the Moneyist Facebook group, you agree to have them published anonymously on MarketWatch. The Moneyist regrets he cannot reply to questions individually.

-Quentin Fottrell

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08-08-26 1300ET