Will Social Security Be Around When I Retire - A Look At The Big Picture

Many of the individuals I speak to, regardless of their age, have doubts that social security will be around by the time they retire. Individuals nearing retirement will often ask if they should take their benefits early so as to get something instead of nothing as they assume Social Security will completely stop paying benefits in the near future. And many younger clients say they figure it won’t be there at all by the time they’re eligible for it.

The short answer to the question of “will Social Security be around when I retire” is, yes - social security will be around when you retire. Let’s review the facts on this situation and dispel any myths that exist around this important subject.

Social Security - Then and Now

A (very) brief history of Social Security can help set the stage for how this social program came to be. Following the American Civil War, American’s saw the first form of what would grow to be The Social Security Program we now have with the Civil War Pension Program. This program was made available to soldiers and, by 1910 when old age was made a qualifying condition, over 90% of surviving Civil War Veterans were receiving some form of military pension.

Fast forward to 1935 and we see America coming out of The Great Depression. Then President Franklin Roosevelt founded the Committee on Economic Security which was instructed to study the entire problem of economic insecurity and to make recommendations that would serve as the basis for legislative consideration by Congress. This ultimately led to the Social Security Act being signed into law by President Roosevelt on August 14th, 1935.

At the time it was signed into law, Social Security was vastly different from what we see today. First off, it paid retired workers only. It also had more people paying into it than drawing out. And Life expectancy was only 63 years old.

However, what was a good system at its origin is not as great of a system today. The reasons? First, life expectancy is much greater. Of those reaching age 65; men can expect to live to 84.4 and women can expect to live to 86.7. Benefits have also been extended to survivor’s benefits, spousal benefits, benefits for children, and disability benefits. I’m not saying these are bad things by the way - just that it leads to a situation where we have more money going out than coming in. Finally, decreased birth rates amongst families from 3 to 2 children on average have led to a situation where we will soon have more elderly individuals collecting benefits than younger people paying into the system.

Can You Depend On It?

According to SSA.Gov, an estimated 173 million workers are covered by Social Security with more than 65 million Americans receiving benefits from it. There are currently around 46.6 million older Americans however by 2033, that number will increase to more than 77 million. This leads to issues in that currently, there are 2.8 workers paying into Social Security for each beneficiary. However by 2037, there will only be 2.1 workers paying into Social Security for each beneficiary. As a result, under current assumptions, the program will only be able to pay full benefits until 2035.

What Happens After 2035?

So what does this mean? Is it time to panic and just accept that Social Security benefits will soon be a thing of the past? No, not at all.

Let’s look at the worst case scenario regarding social security payments. If we got to 2035 and Congress somehow ignored this situation and did nothing to resolve it, then benefits across the board would be reduced by around 25% for all recipients. Payments would continue on at this point just at the reduced benefit amount.

Obviously, this situation would be detrimental to millions of Americans who depend on these benefits to meet their monthly needs, however the money wouldn’t just completely disappear. A common misconception with Social Security is that there is some “pool” of money that all our funds go into for our use at a later date. However this is (for the most part) not correct. When Social Security taxes are collected this month, they are then used the very next month to fund benefits. This is referred to by the Social Security Administration as a “Pay-As-You-Go” system. If there is any excess funds paid into the system, these funds are left in a The Social Security Trust Fund which are then invested into government backed treasury bonds to earn some form of income in what are considered safe investments. Historically, this trust fund did have an excess of funds going into it. Yet as Americans have aged, it has led to the point we’re in now where it currently has a deficit. To make up the deficit, funds in the trust account are being used to make up the shortfall. By 2035, those trust funds will be exhausted and Social Security payments will instead be limited to the funds collected by working employees. If we as a country did nothing to rectify current spending situations, this reduced intake versus outflow issue would be solved by cutting benefits for all by approximately 25%. This reduction in benefits would allow Social Security to continue paying reduced benefits until approximately 2096. At that point, additional changes would need to be made.

Now, do I think Congress would let such a substantial cut in benefits happen? Personally, no I do not. It’s important to remember that all members of Congress are elected officials. Regardless of their political affiliations, any member of Congress who does not support Social Security reform to maintain current benefits would essentially be committing political suicide. The reason is that virtually all of their older constituents would cease to support them and ultimately vote them out. It’s also important to remember that Social Security reform is not a new thing. In the early 1980s, President Ronald Regan had to appoint the Greenspan Commission to study financing issues regarding a serious short-term Social Security financing crisis. This committee led to new laws being signed into effect in 1983 that made numerous changes to the Social Security and Medicare programs including the taxation of Social Security benefits, the first coverage of Federal employees under Social Security and an increase in the retirement age in the next century.

The important thing to remember is that whatever changes occur, they won’t be the first ones Social Security has gone through.

The Potential Solutions

Like all issues dealing with overspending, the sooner they are addressed the quicker and easier they can be corrected. Unfortunately, congress has not made any real improvements despite this issue being discussed since (at least) 2009. However, the potential solutions for correcting the shortfalls of social security are as follows:

1. Raise payroll taxes from 12.4% to 14.4% - currently, Americans pay a total of 12.4% in federal taxes to cover their social security benefits. Of this amount, the employee pays 6.2% and the employer pays 6.2% (unless you’re self employed, then you pay both halves). The first proposed solution would require an amendment to the amount of taxes collected and would raise payroll taxes on social security by about 1% for both employee and employer. A similar solution would be required for shoring up the shortfalls of Medicare which would lead to approximately a 4% increase in taxes - half to be paid by the employee and half to be paid by the employer.
2. Reduce benefits paid out - This is the least popular option as no one wants to be paid less than what they were promised. However, it is a potential solution. If no changes are made, then benefits will be cut by approximately 75% in 2035 and will have decreased (based on current projections) to around 73% in 2096.
3. Increase the age at which benefits begin - Another non-popular option is to raise the eligibility age for when benefits begin. This method has been used in the past and may be on the table again moving forward. While this solution will not fix the issue by itself, it could help eliminate some of the shortfall found regarding future benefits.
   

Conclusion

Social Security benefits are completely integrated into American life - and for good reason. When one is taxed 7.65% of their income (15.3% if they’re self-employed) over the course of their life - they expect to receive the benefit they were paying for. Congress and the American people have some tough decisions to be made in the very near future if they expect to maintain Social Security benefits as they know them beyond 2036.

If you'd like to learn more about Social Security benefits and how they factor into your retirement calculations, you can email us at: questions@LetsWinWithMoney.com