Worried About Social Security Going Broke?
Concerns about Social Security (SS) running out of money pop up from time to time in the financial media. Beyond the headlines there are a number of misconceptions regarding what that really means. In this post I’ll explain what could happen and what the consequences might be. The situation is a lot less dire than the media would have you believe.
There are two primary sources of funding for SS benefits: (1) the SS trust fund and (2) payroll taxes collected from current workers and their employers. The trust fund currently holds about $2.8 trillion, but is projected to become depleted by 2034 based on the number of retirees drawing benefits over the next fifteen years. That doesn’t mean, however, that those benefits would disappear. Even if Congress were to do nothing to fix the system before that date, retirees would still be able to receive 79% of their promised benefits through 2090 just based on payroll taxes. According to Forbes.com, if only a small 2.7% payroll tax increase were to be implemented today (1.35% for the employee and 1.35% for the employer), no cut in benefits would be needed. Even if Congress waited until 2035 to make such a fix, it would require only a 3.7% bump in payroll taxes to stabilize SS moving forward. So the likelihood that retirees stop receiving SS benefits – or will be forced to take a cut – is actually pretty low.
What are other concerns people have expressed about SS? With all the political haranguing these days over immigration, some fear that SS resources are being increasingly drained by undocumented immigrants. In reality it’s actually the opposite. Undocumented immigrants cannot claim Social Security benefits yet pay payroll taxes into the system. AARP determined that SS gained $12 billion from undocumented workers and their employers in 2010 alone.
What about untrustworthy politicians who might be inclined to raid the SS trust fund to pay for pet projects (for example “The Wall”)? In fact, the trust fund has never been part of the general fund and therefore cannot be used for any purpose except for paying SS benefits. While the government has occasionally borrowed money from the fund, it is obligated to pay back everything including interest.
Another misconception is that members of Congress have their own retirement system independent of SS, making it easier for them to be less concerned about SS since is does not directly affect them and their families. While this had been true prior to 1984, today all federal employees (including the president) pay into and receive benefits from the SS system.
This is not to say that changes aren’t necessary. In order to save costs the retirement age has already been pushed out to age 66 and will reach age 67 in a few years. The government could very easily delay it further. Increasing payroll taxes is another bipartisan-supported way to avoid having to cut future benefits to seniors. Higher income retirees now have 80% of their SS income taxed (as compared to only 30% for lower-income taxpayers). That could easily be raised to 100%. And one of the most likely changes will involve the calculation of inflation, which had already changed for income tax brackets as part of the 2017 federal tax overhaul. The new measure (based on what is called the Chained Consumer Price Index) increases more slowly that the previously-used CPI for urban consumers. It wouldn’t be surprising if Congress followed suit for SS.
In short, while work is needed to keep the SS trust fund solvent, there are lots of options, many of which would not have a big impact either on workers or on seniors. So don’t worry about the disappearance of Social Security. There are lots of other more important things to worry about these days.
For me, age 63 and deferring SS now, this is just another vector in a large collection of considerations… What’s the risk and seriousness of not receiving the expected benefit later, as of today? If you KNEW a reduction was pending, that would increase the value of starting sooner and reduce the value of deferring.
By the way as I’m sure you know, but abstracted out, SS income is never taxed at 80%; at worst, all SS income is 80% included in taxable income. Moving to 100% would not reduce SS income to zero, “merely” tax you on it at your highest marginal rate as if it were all earned income. See also my page: http://silgro.com/SS_EMTR.htm