If you’re one of the tens of millions of Americans who currently receive Social Security benefits — or the roughly comparable number who eventually will — no doubt you heard the news last year: For the first time in more than 35 years, the Social Security system’s costs in 2018 exceeded its income.
Is this cause for concern? After all, Social Security is arguably the most important program operated by the federal government. In 2017, one in six Americans received benefits totaling nearly $1 trillion. And more than half of Americans contributed into the program to help fund their retirement in the future.
So the answer to the question, while critical, is unfortunately not crystal clear.
If you’re currently receiving benefits or will over roughly the next decade or so, you have nothing to worry about because Social Security trust fund reserves approach $3 trillion. For the rest of the population, however, benefits could be trimmed —although this assumes Congress does nothing over a number of years. Even then, beneficiaries could still receive nearly 80% of their benefits.
Social Security Isn’t Going Bankrupt
Contrary to what you have probably heard periodically, Social Security isn’t going bankrupt. This is an indisputable fact, notwithstanding that more than half of working Americans don’t think they will receive a benefit when they retire, according to a 2015 Gallup poll. As hard as it may be to believe, Social Security trust funds are now near an all-time high.
Problems could emerge down the road, however.
For many years, Social Security collected more money than it paid out in benefits, and the surplus money collected from payroll taxes was invested in U.S. Treasury securities. Last year marked an about face, however. The birth rate has been falling and a lot more baby boomers retire every day, undermining the ratio of workers to Social Security recipients.
If nothing changes – i.e., if Congress doesn’t vote to increase the Social Security withdrawal rate or take some other action to fix the problem – trust fund reserves could be exhausted in 2034. Social Security still wouldn’t go bankrupt because many Americans would still be contributing to the system. But the payout rate would be cut, leaving Americans with 79% of what they would otherwise get, experts say.
You might think that Congress would act because a big cut in Social Security benefits would be politically catastrophic. But a vote on such a monumental issue is highly unlikely anytime soon. A sharply divided Congress is consumed with other issues such as whether or not to fund the building of a wall along the southern border to keep out illegal immigrants.
Congressional Inaction is Costly
The problem with this – though probably inescapable – is that the longer Congress waits to do something, the more costly the solution will be. If lawmakers were willing to increase payroll taxes to solve the Social Security funding issue in a reasonable period of time, they would have to boost the tax that employees pay from the current level of 6.2% to 7.6%. (The taxable base is a maximum of $132,900 of a person’s wages in 2019.) If they wait until the deadline of 2034, however, lawmakers would have to increase this rate to 8.1%.
Odds are good that this issue will ultimately be resolved. A big reason is that Social Security has been fixed before. That was in 1983, when a bipartisan effort stabilized the program by gradually raising the full retirement age to 67 and for the first time required government employees to pay into the Social Security system.
Until another fix is likely made, older folks should appreciate the fact that most people wind up getting more back from Social Security than they put in. The source for this is the Urban Institute. And it says this has been true for both low-income and high-income people.
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