This is a question we hear regularly from clients and friends. Retirees who are currently collecting social security are worried, “Will Social Security run out of money? If so, how will this affect my current benefits?” Those who are still in the workforce often ask, “Will Social Security be around when I retire? Can I depend on Social Security as part of my financial plan?”
While you may have heard different answers depending on whom you asked, or what television network you were watching, it’s best to actually look at the facts to determine the viability of Social Security and how it will affect you.
Each year, the Trustees of the Social Security and Medicare Trust Funds release lengthy reports to Congress that assess the health of these important programs. The newest reports, released on April 22, 2019, discuss the current financial condition and ongoing financial challenges that both programs face. Let's dig in!
Remind me how Social Security works again
The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI.
Each program has a financial account (a trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits. Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.
How bad is the damage?
Social Security's total cost (benefits paid out) is projected to exceed its total income (payroll taxes collected and interest on the trust fund) in 2020 and remain higher for the next 75 years. The U.S. Treasury will need to make withdraws from trust fund reserves to help pay benefits. The Trustees project that the combined trust fund reserves (OASDI) will be depleted in 2035, one year later than projected in last year's report, unless Congress acts.
Once the combined trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 80% of scheduled benefits for 2035, with the percentage falling gradually to 75% by 2093.
Why are Social Security (and Medicare) facing financial challenges?
Social Security and Medicare are funded primarily through the collection of payroll taxes. Because of demographic and economic factors, including higher retirement rates and lower birth rates, there will be fewer workers per beneficiary over the long term, worsening the strain on the trust funds.
What is currently being done about it?
Currently, not much.
Both reports urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually. Proposals abound in Congress to address these issues. But, politics seems to get in the way of any real progress.
Since those who are currently receiving social security income are not estimated to have their benefits affected until 2035, we may have to wait until then to see any real change. Let's hope not.
What could be done about it?
Some of the Social Security reform proposals on the table are:
Raising the current Social Security payroll tax rate. According to this year's report, an immediate and permanent payroll tax increase of 2.7 percentage points to 15.1% would be necessary to address the long-range revenue shortfall (3.65 percentage points to 16.05% if the increase started in 2035).
Raising or eliminating the ceiling on wages currently subject to Social Security payroll taxes ($132,900 in 2019).
Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
Reducing future benefits. According to this year's report, to address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 17% for all current and future beneficiaries, or by about 20% if reductions were applied only to those who initially become eligible for benefits in 2019 or later.
Changing the benefit formula that is used to calculate benefits.
Calculating the annual cost-of-living adjustment for benefits differently.
Combining some of these solutions may also lessen the impact of any one solution.
So what does this mean for me?
The results are not as dire as some may have assumed. While the trust fund reserve is estimated to run out of money in 2035 this does not mean the end of social security benefits, as many are led to believe. On the contrary, as long as people are still working, payroll taxes are still being collected and used to pay out benefits, benefits will continue, but only at an estimated 75-80% of current promises.
Social Security is a meaningful part of most Americans retirement plan. It is best to work with a qualified financial planner to see how Social Security fits in your plan and how changes in benefit amounts will affect your ability to retire on your terms.
You can view a combined summary of the 2019 Social Security and Medicare Trustees Reports and a full copy of the Social Security report at www.ssa.gov. You can find the full Medicare report at www.cms.gov.