Myth: The Social Security system is bankrupt
We've all been there before, a perfectly pleasant and enjoyable evening at a cocktail party is progressing swimmingly. The kids are tucked in, the dishes are cleaned and put away, and the conversation is engaging. Enter wise guy, stage left. We all know who he is; the friend/relative/neighbor/co-worker who knows it all.
After a pleasant day, Billy Know-It-All ramps it up into high gear, announcing that “Nobody is going to see a dime of Social Security because the system is bankrupt”. With the calm broken, how are you going to respond to that?
So how do you handle Billy? To start, maybe don't invite him to your next party (said tongue in cheek...sort of). But since you're already in the spit, let's arm you with a couple of facts to help dispel Billy's claims that Social Security is, in fact, bankrupt.
Where Does the Trust Fund Stand Currently?
According to the 2016 Social Security Trustees Report, the Social Security trust fund has a balance of approximately $2.813 trillion and actually ran a surplus in 2015 with 169 million taxpayers paying $920 billion in taxes into the fund and 60 million benefit recipients collecting $897 billion in benefits from the fund.
According to their projections, this surplus relationship exists until 2020, at which point benefits paid out begin to exceed taxes paid in. What prompted this reversal of fortune? As baby boomers transition from the work force to the cruise ships, there will be a significant reduction in the number of people paying into the system and, in turn, a comparable increase in the number of people drawing on the system.
Expenses are projected to continue to outpace inflows until 2034, at which point the trust fund drops to zero. This is where Billy gets his ammunition to make the point that the Social Security system is going away.
If the projections hold, it’s true that the Social Security trust fund will be exhausted in 2034, but forecasts show 79% of projected benefits will still be paid. How? People will still be working, paying payroll taxes into the system. (Note the inflow number above for 2015.) In fact, it’s possible that Social Security will actually revert back to how it was originally intended to operate when FDR set it up in the 1930s - a pay-as-you-go system.
Of course, the scenario above only plays out if Washington takes no action to restore solvency to the system...
What Can Be Done to Restore Solvency to the Social Security System?
The annual Social Security Trustees Report not only examines the current state of Social Security, it also determines the steps that can be taken to restore solvency to the trust fund. In doing so, it’s possible to extend the projected date when funds will be exhausted from the current projected date in 2034.
Examples of steps to restore solvency include:
- Increase payroll taxes by 2.6%: Increase the FICA tax currently shared by employer and employee, increasing their respective burdens by 1.3% each.
- Decrease the annual cost of living adjustment: This doesn’t mean eliminating the current annual adjustment for inflation, but reducing it.
- Increase Full Retirement Age: Likely not aimed at people nearing retirement (or even nearing nearing retirement), but rather for the Gen Xers and Gen Yers. The Full Retirement Age (currently 67) can be increased to age 68 or 69.
- Eliminate or increase the cap on taxable wages: One of the more frequently touted solutions is to increase (or even eliminate) the cap on taxable wages, currently $127,200 in 2017.
- Reduce benefits for younger generations: Different reductions have been floated, but they typically range from 10-20%.
By no means is the Social Security trust fund in perfect shape. When FDR and his team ran the initial projections for the Social Security system, they never anticipated the baby boom that followed World War II. That was followed by an unprecedented boost in economic growth in the 1950s and 1960s, resulting in a larger-than-ever-anticipated workforce paying into the Social Security system. A big fat trust fund was borne from that workforce and now those recent or soon-to-be retirees are aiming to collect their benefits.
Hopefully, our elected officials in Washington will agree on a combination of the solutions noted above so solvency can be restored to the Social Security trust fund. Obviously, the sooner that a solution is implemented, the less drastic the changes have to be. Things get more difficult as we get closer to the year 2034.
For more of Billy Know-It-All's antics, see the following blogs:
Myth: I'm not going to live long enough to benefit from delaying collection of my Social Security benefit
Myth: Take the money and run - it doesn't pay to delay collection of my Social Security benefit