You’ve likely heard the recent update to Social Security’s solvency from a couple weeks ago. Since I’ve received a couple questions on this I figured it is a good topic to address.

In short, the Social Security trust funds are projected to run out by 2035. Does that mean your benefits will be eliminated?

There are two sources of funding for SS benefits: (1) payroll taxes and (2) reserves (build up from years of revenues that exceeded expenses).

Obviously, the payroll taxes never dry up as the government continues to levy those every year, which is why there will always be some level of benefits, but the trust funds can be depleted if the expense of the program is sufficiently higher than revenue of the program for too long.

Current projections show that scheduled benefits would be cut by 17% when the reserves run dry in 2035 if Congress doesn’t take action.

Note: The primary driver of the solvency issue is declining birth rates. Whereas women used to have three children on average that has declined to slightly below two so there are less workers paying in while more workers are receiving benefits.

Additionally, the normal retirement age at which one can collect full benefits has not kept up with increases in life expectancy since the program began in the 1930s.

However, anyone who understands how politicians work will agree that Congress will most likely take action. The retiree demographic is very large and growing larger by the year (meaning it’s a powerful voting and lobbying group).

Every politician knows it is political suicide if they don’t address this issue thereby causing benefits to be cut.

There are a few levers Congress can pull to maintain solvency and scheduled benefits:

  1. Increase full / normal retirement age for future recipients
  2. Increase payroll tax rates
  3. Increase income base upon which payroll taxes are levied (currently capped at $168,600)
  4. Means-testing has been floated

In fact, this is not the first time the program has run up against this very same issue. Congress had to take action in 1983 to prevent benefit cuts due to reserves drying up within months.

In 1983, Congress added taxation of benefits if adjusted gross income exceeded certain levels, the revenue of which was directed back to the program. Now, up to 85% of Social Security benefits can be taxable.

In 1983, Congress also increased the full / normal retirement age for future beneficiaries to 67 from 65. However, this age increase didn’t take effect until 2000 so it didn’t affect current beneficiaries or anyone even within 17 years of retirement age.

Government projections are notoriously overly-optimistic. The 1983 reforms supposedly “ensured” the program would remain solvent for the next 75 years (until 2060), yet here we are with reserves projected to dry up around 2035, or 25 years earlier than expected back in 1983.

The bottom line is Social Security is a poorly-designed program from the start, but Congress will likely take action to extend solvency. Let’s just hope they don’t wait until the last minute.

Print Friendly, PDF & Email