Your Financial Future: Funding Social Security

When Franklin D. Roosevelt started Social Security in 1935, the goal was to make the program self-funding. That way, he hoped no politician would be able to hold it hostage to funding from general revenues. The funding would come from a special tax on wages paid equally by employer and employee. In addition, any income tax revenues from Social Security earnings and interest earned by the trust fund would go into the fund. Current employees were going to be funding retired workers.

This worked fine at the beginning because Social Security only provided retirement income to retired workers and life expectancies were much shorter then. In 1939, spousal and survivor benefits were added to the program. No additional income stream was provided to pay these increased benefits. Later disability benefits were also added.

Today, 67 million beneficiaries receive benefits and 180 million pay into the system. These benefits are an important source of income for many. Although they were never intending to provide all income needs, they represent a much bigger portion for lower income recipients.

Every year, the Social Security trustees are required to present a trust fund report to Congress. The trustees, who are mostly Cabinet secretaries, report on the solvency of the fund over the next 75 years. They reported that the assets in the fund declined $22 billion in 2022 to a total of $2.830 trillion. At the current rate, the fund will run out of money in 2034 without action by Congress. At that time contributions from current workers would only cover about 80% of promised benefits.

We faced a similar situation in 1983. The fund was scheduled to run out of money in 1985. Ronald Reagan was president and Tip O'Neill was Speaker of the House. They came to a compromise with the last major changes that exist today. Full retirement age was gradually raised to 67 and up to 85% of benefits became taxable at that time.

These are two variables that could be in consideration this time. Also there may be a change in the way cost-of-living benefits are calculated and possibly all wages could be included to be taxed. Currently only wages up to a certain limit are taxable for Social Security. There are some discussions that investment income may also be taxed.

Like all government programs, there are only two ways to control the trust fund balance: raise taxes or other sources of income and cut benefits or cash outflows. Neither is popular with many citizens. Congress will come up with some solution because politicians of neither party can be reelected if they reduce Social Security.

Since Social Security is such an important retirement asset, it is important to take steps to protect your family. The full retirement age is 67 for anyone born in 1955 or later. If you start benefits at age 62, which is the earliest allowed for retirement reasons, you will get 30% less every month for life. You will get more checks than if you waited, but much smaller ones. Since the size of these checks can affect a family for decades, there can be a huge difference in the amount of money a family receives. This is especially important to a younger survivor who will likely receive these benefits when other income may not be available and taxes will be higher.