This particular question is one that we encounter rather frequently, usually in the context of making decisions around when to apply for Social Security benefits. We will address the When to Apply question in our next blog, but thought we should begin with the foundational question of Will Social Security Still Be Available?
There is a lot of rhetoric that says our government has “spent” all of the Social Security surplus, or that there are only “IOU’s” in the Social Security Trust Fund. Of course, these ideas have been around a long, long time, and are part of that sector of “common knowledge”, that is not actually all that knowledgeable.
How Is Social Security Funded?
When President Roosevelt signed the Social Security Act into law in August of 1934, it was designed to function as a “pay as you go” system. The contributions of current workers would go into a Trust Fund, to be paid to current retirees. The ultimate benefits are in part determined by how much you pay into the Trust Fund over your last 35 years of earnings. The concepts around claiming your benefits “early” or waiting until “Full Retirement Age” and “Delaying Benefits” all came later.
The Social Security Trust Fund is managed by the Secretary of the Treasury along with a Board of Trustees. The Trust is required by law to invest all excess funds not required to be paid out in benefits, to purchase US Treasury Securities. They are redeemable whenever needed to pay benefits to retirees.
What is the Current Status of the Social Security Trust Fund?
Over the past 84-year history, the Social Security Trust Fund has collected roughly $21.9 trillion dollars, and paid out $19 trillion, currently leaving about a $2.9 trillion surplus.
In their annual reports, the Social Security Trustees assess the current rates of contributions to the fund, projections of income and payouts, including COLA’s (Cost of Living Adjustments) to cover the next 75 years. The Trustees currently project that with no changes enacted by Congress, that the Trust Fund will be depleted in 2035.
What Does It Mean if the Social Security Trust Fund is Depleted?
If the Social Security Trust Fund is depleted in 2035, it simply means that payouts to retirees will once again be solely dependent upon the amount of income contributed by the workers and employers at that time. The trustees estimate this impact on retiree benefits: there will be enough income from revenues alone to continue to provide 70 to 75% of retirees’ benefits.
Is There Anything That Can Be Done to Address the Potential Shortfall?
Certainly. The Trustees have presented their reports beginning in 1941. From a Social Security Bulletin in 2010 (emphasis mine):
“The longer-term analysis of the actuarial status of the Social Security trust funds provides the Congress with an essential early warning of future challenges and provides the time to make desired changes in a careful and thoughtful manner. Although legislative changes may sometimes appear to be decided at the last minute before a crisis, the long advance warning of financial challenges provided by the trustees in the annual reports has always promoted broad consideration of options for change that allow any eventual modification of the law to be based on sound analysis and consideration of a comprehensive view of possible changes and their effects.”
Kind of makes you go: “Hmmm… I wonder why they don’t do anything…or haven’t done anything yet“?
In fact, there have been a number of proposals made over the years to make structural changes to support Social Security, but thus far, there has not been the political will or focus to produce the changes needed. Some of these have been:
- Increasing our payroll taxes from 12.4% (split between employers and employees) to 15.18%.
- Increasing the limit on taxable earnings: we currently pay 12.4% of social security taxes on our earnings up to $132,000 per year. When Social Security was originally passed, it was designed to tax 90% of all earnings, but with the current limits, only about 83% of all earnings are taxed. Removing the limits completely on taxable earnings would eliminate the whole projected deficit (in 2035) and even give us a small surplus.
- Reduce benefits- this is almost guaranteed to be a “non-starter”.
- Raise the normal/full retirement age: this could certainly be considered as life expectancies have continued to rise, and would be similar to what was done in 1983 to gradually increase the full retirement age to age 67.
Our goal in this blog has been to provide some factual information regarding the solvency of Social Security and to try to combat some misinformation that currently exists. As you can surmise from the information we have provided, Social Security will survive for a long time going forward, though the potential long-term payouts are yet to be determined by legislative action. In our next blog, therefore, we will address the question of When you should apply for your Social Security benefit.
The information provided is drawn primarily from the latest Social Security and Medicare Boards of Trustees report. If you would like to view the report, you can go to this link: https://www.ssa.gov/OACT/TR/2019/