Many people are skeptical when I discuss their Social Security benefits as a part of their retirement plan. The common refrain is that they don't want to count on Social Security because "it's going to run out of money soon."
Today, I thought we should clarify what it means for Social Security to "run out of money" and what the implications are for those planning for retirement.
First, what is the Social Security trust fund? It is actually two separate funds that are set up to pay regular Social Security benefits and the other is for disability benefits. The "regular" Social Security trust fund currently has a surplus of around $2.9 trillion, but starting with 2021, that reserve has started to deplete.
The fund is expected to be depleted by 2033 according to the Social Security Administration. If a solution to the problem is not reached prior to 2033, (the disability trust fund is scheduled to run out in 2057) then the administration would only be able to pay benefits equal to 76% of the current retirement benefit level. This is a really important statistic because it tells us a lot about the makeup of what contributes to your Social Security retirement benefit.
Since 76% of retirement benefits will still be payable after 2033, that means that the trust fund only accounts for only a small percentage your total benefit. Most of your Social Security retirement benefit comes from current taxation. Today, both you and your employer each pay 6.2% of your income towards the program.
This amount equates to 89.6% of the cost of Social Security. Another 3.8% comes from the taxes you pay on your Social Security retirement benefits and the remainder comes from the trust fund. This hopefully puts into perspective what the trust fund means to the overall program. While I don't mean to downplay its importance, the fund could easily be made fully solvent with a few minor changes.
So how do we "fix" Social Security?
1. Cut benefits. This is by far the least appealing option for retirees and one that politicians would likely never let happen because it would be nearly impossible to allow this to happen and still get re-elected. I would say this is clearly the least likely option.
2. Raise the retirement age. Currently, the latest you can be considered fully insured for SS benefits is age 67. The age has only changed from age 65 to age 67 since inception. Meanwhile, life expectancy has continued to rise. If children born today (or younger than hypothetically say age 40) had their benefits delayed until age 70, the program would likely become solvent.
3. Raise or eliminate the earnings limit subject to taxation. Currently you are no longer taxed for Social Security above $147,000 per year. This number could increase to a level that would make the fund solvent again.
4. Raise the 6.2% tax rate. If the 6.2% tax both you and your employer currently pay to fund Social Security were to be raised, the shortfall could be eliminated as well.
While none of these options are particularly favorable, they are better than the reduction of benefits to current retirees. Since most of our GDP in the U.S. is based on consumer spending, the more money in the hands of retirees, the better. Clearly it isn't particularly hard to "fix" Social Security, the problem is coming up with the best solution (or combination of several). My point is, even if the Social Security retirement trust fund runs out of money, it likely wouldn't be the end of the world and the government could easily maintain current benefit levels with a few minor tweaks.