If you watch the news, listen to the radio, or read financial blogs, undoubtedly you have come across several stories discussing the health of Social Security. The opinions on Social Security range from a program in need of minor adjustments to a failed program in need of a structural reform. However, as with most things often describes in extremes, the truth is probably somewhere in between. In other words, Social Security probably does need some kind of structural changes but it’s probably not going to disappear anytime soon.
If you are currently retired or close to retiring, then you probably have nothing to worry about. Your Social Security benefits will continue to be paid out to you according to your set benefits schedule. However if you are several years away from claiming Social Security benefits, should you be worried and is it time to start making alternate plans?
According to the Social Security Administration, approximately 68 million Americans receive some sort of Social Security retirement, disability, or death benefit. Social Security is referred to as a “pay-as-you-go” system, meaning those who are currently working pay the benefits of today’s retirees. So, how much do workers pay into Social Security?
As of 2020 the first $137,700 of an individual’s annual wages is subject to the Social Security Payroll tax. Half of that is paid by the employer and the other have by the employee with self-employed individuals paying the full amount. Payroll taxes collected are then put into the Social Security trust fund and invested in guaranteed and stable government securities. The funds are then used to pay benefits for those who are currently retired.
Demographics. Demographic changes in America are putting a major strain on Social Security. Better healthcare and longer lifespans means the number of retirees has been steadily increasing over time while the birth rate has been steadily decreasing. This means there are fewer workers paying into Social Security who have to support a greater number of retirees.
According to the Social Security Administration, Social Security is already paying out more money than it takes in. However, by drawing on the Social Security trust fund, also known as the Old-Age and Survivors Insurance (OASI) Trust Fund, the Social Security Administration estimates that Social Security should be able to pay 100% of scheduled benefits until fund reserves are depleted in 2034 (estimated). Once the trust fund reserves are depleted, payroll tax revenues should still cover about 77% of scheduled benefits. This means that in 2034, if no changes are made, beneficiaries may receive 77% of their estimated Social Security benefit.
Adding to Social Security’s problems is the unwillingness of Congress to address the issue. Simply put, Social Security is a polarizing topic among law makers and as far as they are concerned, 2034 is a long-time away, well after they have left office.
While no one can predict the future, there are a few possible solutions that have been proposed to help keep Social Security solvent in the future. Some of those solutions are as follows:
- Raise the current payroll tax.
- Raise the current ceiling on wages currently subject to the payroll tax (the current limit is $137,700).
- Raise the retirement age beyond age 67.
- Reduce future benefits.
- Means testing.
- Change the benefit formula that is used to calculate benefits.
- Change how the annual cost-of-living adjustment benefit is calculated.
While none of these solutions seem ideal, it is likely we will see a combination of these as Congress debates, fights, and ultimately comes to a compromising solution.
What It Means for You
First and foremost, the biggest takeaway is that Social Security is not disappearing. If you are currently retired or planning to retire soon, you can expect to receive your estimated Social Security benefit. However, younger individuals who may not retire for another 10 years or more are at risk of seeing reduced benefits and/or having to wait longer to receive those benefits.